After eurozone inflation fell again in October by more than expected, and the economy shrunk, putting it on the verge of a recession, investment managers discuss the impact.

Eurozone inflation dropped to 2.9 per cent in October from 4.3 per cent in September – its lowest level since 2021 – according to flash estimates from the EU statistics agency Eurostat released on Tuesday. The figures suggest that efforts to curb inflation in the zone are paying off, reinforcing the view that the European Central Bank has likely come to the end of its rate hikes. 

Core inflation, which excludes volatile fuels and food prices, fell more moderately to 4.2 per cent from 4.5 per cent. The central bank has said that interest rates, which currently stand at a high of 4 per cent, would be set at sufficiently restrictive levels for as long as necessary for a timely return of inflation to its 2 per cent target. Last week, the ECB kept interest rates at the same level, after 10 consecutive hikes. See here. 

But the drop in inflation comes at a cost, with the eurozone’s economy shrinking by 0.1 per cent between July and September, sparking speculation that the euro area may fall into a technical recession in the second half of 2023. Ireland and Austria recorded the sharpest declines while Germany shrunk by 0.1 per cent. France and Spain grew by 0.1 per cent and 0.3 per cent respectively, Eurostat figures show.

In the UK, interest rates are currently higher than in the eurozone at 5.25 per cent, but UK inflation is also higher at 6.7 per cent. See more coverage here. 

For 2025, the ECB anticipates inflation to average 2.1 per cent in the eurozone.

Here are some reactions from investment managers to the figures.

Daniele Antonucci, chief investment officer at Quintet Private Bank (parent of Brown Shipley)
“Today’s figures from the eurozone suggest that the European Central Bank is likely done with its interest rate hiking cycle. We expect a plateau in rates at current levels, in the context of slowing inflation and economic growth, followed by cuts from the middle of next year. Inflation now has a 2 per cent handle, coming in at 2.9 per cent from 4.3 per cent previously, lower than expected. Markets had repriced ahead of this, given a downside surprise in German inflation. Core inflation, which strips out volatile components such as energy and food, decelerated too. While it remains elevated at 4.2 per cent, it is slowing across services and goods. 

“The rate of economic growth is now negative. While one quarter doesn’t make a trend, high-frequency indicators suggest that this is the start of a recession. At just -0.1 per cent, it looks as if it’s a mild one, at least for now, though with downside risks. Our tactical 12-month view remains cautious. We’ve invested in high-quality bonds, especially US Treasuries, over riskier equity markets and high-yield bonds. We expect central bank rates in developed markets to be close to or at the peak, but we don’t see rate cuts in the near term. And we still think that investors are too optimistic about economic and earnings growth.

“Building on our position in US Treasuries, we have recently decided to add longer-dated eurozone and UK government bonds. Yields are at historically attractive levels as we approach the peak in interest rates. As economic growth and inflation continue to slow, we think bond yields will fall and bond prices increase. We’ve also invested in low-volatility equities in the US and Europe. What’s more, relative to our long-term allocation, we’re positioned with a lesser weight to US equities (slightly) and eurozone equities (more markedly).”

Tom Lemaigre, portfolio manager at Janus Henderson
“It seems the European Central Bank’s desire to get inflation down post their 10 successive rate hikes is starting to work but at the expense of hurting those households and businesses that are seeing loan costs go up. Consequently, the economy is slowing but I think it would be premature to talk about rate cuts. As a team we have always argued that you would see cyclical disinflation due to the lapping of higher input prices (e.g. oil and gas and other raw materials to make goods) but that on the services side (i.e. wage inflation) inflation would remain stickier to the upside. Nothing in this release makes us question our current thesis.”

Charles Hepworth, investment director at GAM Investments
“The softening in the inflation rate was down to an easing in energy costs and declining food price inflation. Stripping out these two inputs, core inflation also softened to 4.2 per cent annualised down from 4.5 per cent the previous month.

“This good news was sadly negated by data that showed economic output for the eurozone fell by 0.1 per cent in the third quarter. The medicine of raising interest rates to combat high inflation has gone past the point of pain relief and is now to starting to hurt the patient. It’s for this reason the ECB stood still at last week’s Governing Council meeting and will likely have completed their policy hiking now.”