1、We maintain our l ong-hel d view that the energy crisis wil l push the Europeanneconomy into recession this winter,as surveys and production data point to asizeabl e sl owing in energy-intensive industries,and high inflation wil l reduce realhousehol d incomes.But we now see a shal l ower recession

2、as the hard datahave remained surprisingl y resil ient,the rebal ancing of the gas market hasreduced the risk of energy rationing and governments have provided significantfiscal support.We forecast that the Euro area economy wil l contract by onl y0.7%from 2022Q4 to 2023Q2(vs 1.1%before).That said,E

3、uropes gas suppl y situation remains fragil e,fiscal pol icy wil l probabl ynsl ow growth in 2023-24 as the energy support winds down,and the gas crisis isl ikel y to l eave substantial suppl y-side damage.We therefore see a mutedrecovery and shave our growth forecasts for 2023H2 and 2024Q1.We now l

4、 ookfor area-wide growth of-0.1%for 2023 and 1.4%for 2024,cl ose to consensusover the next two quarters but sl ightl y bel ow for the remainder of 2023 and earl y2024.Looking across countries,we expect Germany and Ital y to be more affected bynthe energy crisis than France and Spain.Rising sovereign

5、 yiel ds,high debt andweak growth l eave Ital ys new government on a narrow fiscal path,highl ightingmedium-run fiscal vul nerabil ities.The French government struggl ed to buil d amajority around its 2023 budget and pol itical uncertainty(incl uding the chance ofearl y el ections)remains.Al though

6、gas prices have fal l en significantl y,we expect Euro area inflation tonpeak in December given continued energy pass-through and strong underl yingmomentum.Core inflation is l ikel y to ease gradual l y over 2023 as goods priceinflation cool s,but we see sticky services inflation due to continued l

7、 abour andenergy cost pressures.We l ook for core inflation to end 2023 at 3.1%and 2024at 2.2%.We expect the ECB to step down the pace of hiking to 50bp in December as thendeposit rate approaches the neutral rate,the ECB staff cut their growthprojections and the Fed sl ows its pace of hiking.But giv

8、en a shal l ower recessionand ongoing inflation pressures,we now l ook for the Governing Council to takethe deposit rate to 3%with a final 25bp hike in May 2023.We expect ECBofficial s to decide in Q1 to start a passive unwind of its asset purchaseSven Jari St ehn+44(20)7774-8061| Gol dman Sachs Int

9、ernational St ef f an Bal l +44(20)7774-0471|steffan.bal l Gol dman Sachs International Chri st i an Schni t t ker+44(20)7774-2269| Gol dman Sachs InternationalFi l i ppo Taddei +44(20)7774-5458|fil Gol dman Sachs InternationalIbrahi m Quadri +44(20)7774-5864| Gol dman Sachs InternationalAl exandre

10、St ot t +44(20)7774-5256|al Gol dman Sachs InternationalEuropean Economi cs Anal yst 2023 Europe Outlook:Mi lder Recessi on,Hi gher Termi nal Rate(Team Europe)16 November 2022|6:27PM GMTInvestors shoul d consider this report as onl y a singl e factor in making their investment decision.For Reg AC ce

11、rtification and other important discl osures,see the Discl osure Appendix,or go to following is a redacted version of the original report published on 16 November 2022 16 pgs.programme(APP)in Q2.Whil e data revisions now suggest a sl ightl y smal l er UK contraction in H2,wencontinue to l ook for a

12、deeper recession in the UK than in the Euro area given weakmomentum,l ess fiscal support and suppl y-side constraints.The l abour market hasremained firm despite the sl owing of the economy,pointing to persistent wage andinflation pressures ahead.Al though we expect the BoE to step down the pace ofh

13、iking to 50bp in December,we think the BoE needs to take Bank Rate intosignificantl y restrictive territory despite its dovish rhetoric and maintain our forecastfor a terminal rate of 4.5%in May 2023.Mi l der Recessi on,Hi gher Termi nal Rat e We expect the energy crisis to push the Euro area into r

14、ecession this winter.The surge in energy prices is l ikel y to weigh notabl y on industrial activity and forward-l ooking indicators point to sizeabl e production cuts ahead,especial l y in gas-intensive industries(Exhibit 1,l eft).At the same time,we expect high inflation to reduce real househol d

15、incomes sharpl y,which wil l l ikel y push down consumer spending over the winter(Exhibit 1,right).That said,we now expect the Euro area recession to be shal l ower.First,the incoming data have remained more resil ient than expected(Exhibit 2).Real GDP in Q3 surprised to the upside and the hard data

16、 coming into Q4(September industrial production and retail sal es)showed continued growth.Whil e some of the resil ience in industrial production l ikel y reflects the easing in suppl y bottl enecks,European manufacturing has(so far)adjusted remarkabl y wel l to higher energy prices.Exhi bi t 1:A Ch

17、al l engi ng Outl ook f or the European Economy Source:Goldman Sachs Global Investment Research,Haver Analyti cs16 November 2022 2Gol dman SachsEuropean Economi cs Anal ystSecond,the rebal ancing of the gas marketwith a buil d-up of significant gas storage and sharp decl ines in gas priceshas reduce

18、d the risk of energy rationing this winter(Exhibit 3,l eft).Whil e a col d winter remains a risk,our estimates suggest that the Euro area shoul d make it through the winter without running out of gas,avoiding costl y energy rationing as a resul t.Third,governments have provided significant fiscal su

19、pport to cushion the growth hit(Exhibit 3,right).Taken together,Euro area governments provided energy support of about 2.5%of GDP in 2022,which we expect to be extended to 2023.These measuresmainl y focused on househol d supportare l ikel y to provide significant offset to the contraction in real in

20、comes.We therefore revise up Q4 and Q1,pointing to a shal l ower recession,with a cumul ative decl ine in real GDP of 0.7%.We now expect the Euro area economy to contract by Exhi bi t 2:The Hard Data Remai n Resi l i ent Source:Goldman Sachs Global Investment Research,Haver Analyti csExhi bi t 3:Gas

21、 Storage and Fi scal Support to Cushi on the Recessi on Source:Goldman Sachs Global Investment Research,Haver Analyti cs16 November 2022 3Gol dman SachsEuropean Economi cs Anal yst0.2%in Q4(vs 0.4%before),0.4%in Q1(vs 0.6%)and 0.1%in Q2(unrevised).That said,we see several reasons for a muted recover

22、y from the recession.First,Europes gas suppl y situation remains fragil e and we expect tensions in the gas market to re-intensify after the winter(Exhibit 4,l eft).Gas storage is l ikel y to be l ow after this coming winter and the Euro area wil l struggl e to fil l the gas tanks for next winter,es

23、pecial l y if China reopens as expected in Q2.Whil e our commodity team has l owered its summer 2023 gas price forecast to EUR180(vs EUR235 before),they maintain the view that gas prices wil l have to rise again after the winter to attract sufficient l iquid gas to Europe.Second,fiscal pol icy wil l

24、 l ikel y act as a significant drag on growth in 2023-24 as the emergency energy support comes to an end(Exhibit 4,right).Whil e the Recovery Fund and off-budget funds hel p to cushion the extent of the fiscal drag,we now l ook for a negative fiscal impul se in 2023(-0.4pp)and 2024(-1.1pp).Third,we

25、see substantial suppl y-side damage from the energy crisis(Exhibit 5).Economic studies suggest that the reduction in gas suppl y impl ies a significant hit to potential output,al though economies can l ower this cost by substituting away from gas as an input into production over the medium term.Cons

26、istent with this,we expect a permanent hit of 2.4%to Euro area output,in sharp contrast to the V-shaped rebound seen from the pandemic.Exhi bi t 4:Drags on the Recovery Source:Goldman Sachs Global Investment Research,Haver Analyti cs16 November 2022 4Gol dman SachsEuropean Economi cs Anal ystWe ther

27、efore l ook for a sl uggish recovery from the energy recession and nudge down growth in 2023H2 and 2024Q1.More specifical l y,we now forecast area-wide growth of 0.2%,0.3%and 0.4%in 2023Q3,2023Q4 and 2024Q1(each down by 0.1pp).Our forecasts are now cl ose to consensus for the next two quarters but s

28、l ightl y bel ow other forecasters for the remainder of 2023 and earl y 2024.As a resul t,we now l ook for-0.1%growth in 2023(in l ine with consensus)and 1.4%for 2024(a bit bel ow the 1.5%consensus).Given the potential for substitution away from gas over time,we now seesl ightl y stronger growth in

29、2025-27.Looking across countries,we expect Germany and Ital y to be more affected by the energy crisis than France and Spain(Exhibit 7).The most important reason is that Germany and Ital y were more rel iant on Russian gas imports,whil e France and Spain Exhi bi t 5:The Permanent Cost of the Energy

30、Cri si s*Scarri ng esti mates are proxi ed by the shortf all i n the level of real GDP wi th respect to f orecast precedi ng the start of the Russi a-Ukrai ne war.We use the 2026Q4 hori zon f or the IMF and the OECD and 2024Q4 f or the ECB.Source:Goldman Sachs Global Investment Research,OECD,IMF,ECB

31、Exhi bi t 6:Shal l ower Recessi on,Muted Recovery Source:Goldman Sachs Global Investment Research,Bloomberg16 November 2022 5Gol dman SachsEuropean Economi cs Anal ysthave more diversified energy sources and are rel ativel y more service-sector intensive.This is especial l y the case for Spain,which

32、 stil l has room to rebound from the covid crisis.Inflati on Peak i n Si ght Al though gas prices have fal l en significantl y since their summer highs,we stil l see the peak in inflation ahead of us.Starting with energy,we estimate that current spot gas prices are stil l above the whol esal e gas p

33、rice impl ied by the HICP gas component,even considering upcoming price caps.Whil e our commodities teams l ower TTF gas price forecast for the next year reduces our headl ine projection somewhat,we continue to l ook for el evated headl ine pressure(Exhibit 8).Regarding food prices,we see gl obal,ra

34、ther than l ocal,factors as the predominant driver of Euro area food inflation,and these are unl ikel y to ease meaningful l y in the near term.Exhi bi t 7:A New North vs South Di vi de Source:Goldman Sachs Global Investment Research,Eurostat16 November 2022 6Gol dman SachsEuropean Economi cs Anal y

35、stTurning to underl ying price pressures,we expect sequential core inflation pressures to ease gradual l y over coming months as goods price inflation weakens.But we find that there is stil l upward pressure on services inflation due to a del ayed pass-through of rising energy and l abour costs to c

36、onsumer prices(Exhibit 9).The key inflation issue to watch in 2023 is l abour cost pressures.Euro area wage growth has picked up to al most 4%,and we expect the recession to push up the area-wide unempl oyment rate onl y sl ightl y,from 6.6%to 7.2%in Q2.Combined with continued high headl ine inflati

37、on,we expect wage growth to average around 4.5%in 2023H1,before easing in l ate 2023(Exhibit 10).Whil e the stabil isation of l ong-term inflation expectations suggests that the risk of pronounced second-round effects remains l imited,we expect firm wage growth to keep core inflation pressures el ev

38、ated through 2023.Exhi bi t 8:More Energy Inflati on to Come Source:Goldman Sachs Global Investment Research,Haver Analyti csExhi bi t 9:Persi stent Core Pressures Source:Goldman Sachs Global Investment Research16 November 2022 7Gol dman SachsEuropean Economi cs Anal ystTaken together,we expect head

39、l ine and core inflation to peak in December at 11.7%and 5.3%,respectivel y.We then expect inflation pressures to ease but see core inflation above the 2%target for some time,reaching 3.1%,2.2%and 2%at the end of 2023,2024 and 2025,respectivel y.Our inflation forecasts are thus notabl y above the EC

40、Bs l atest projections,as wel l as current market pricing(Exhibit 11).A Hi gher ECB Termi nal Rate Fol l owing rapid ECB hikes,we expect the Governing Council to step down the pace of hiking to 50bp in December.A smal l er hiking increment seems l ikel y given that the deposit rate has now approache

41、d l evel s that might be regarded as“neutral”for the inflation outl ook,we are expecting a sizeabl e downward revision to the staff growth forecasts in December,and the Fed is l ikel y to step down to a 50bp hike in December.Exhi bi t 10:Watchi ng Wages Source:Goldman Sachs Global Investment Researc

42、h,Haver Analyti csExhi bi t 11:Inflati on Peak i n Si ght Source:Goldman Sachs Global Investment Research,Haver Analyti cs,ECB16 November 2022 8Gol dman SachsEuropean Economi cs Anal ystWhil e another l arge upside inflation surprise in November coul d force the Governing Council into a third 75bp h

43、ike in December,a step-down to 50bp l ooks more l ikel y.Given our expectations for a shal l ower recession and ongoing inflation pressures,we now l ook for the Governing Council to take the deposit rate more cl earl y into restrictive territory,reaching 3%in May 2023.We l ook for another 50bp hike

44、in February fol l owed by two 25bp steps in March and May.The risks around our peak 3%ECB rate are two-sided,with(1)upside risk from potential l y more persistent core inflation via more pronounced second-round effects,and(2)downside risk from a deeper recession or a possibl e flare-up in sovereign

45、risk in Ital y.We do not l ook for ECB rate cuts until 2024Q4,two quarters after the Fed and one quarter after the BoE.The Governing Council has signal l ed that it wil l l ay out the principl es for QT at the December meeting and we expect ECB official s to decide in Q1 to start a passive unwind of

46、 its asset purchase programme(APP)in Q2,which we bel ieve bond markets shoul d be abl e to digest.It is possibl e that the Governing Council wil l announce run-off as soon as December(together with the publ ication of the broad principl es)but a del ay between the decision to impl ement and the actu

47、al rol l-off seems l ikel y.Keepi ng An Eye on Euro Area Pol i ti cal Ri sk We wil l focus on three Euro area pol itical risks in 2023,in addition to devel opments around the war in Ukraine.First,Ital ian PM Giorgia Mel oni set out the fiscal deficit objectives for 2022 and 2023(at-5.6%and-4.5%of GD

48、P,respectivel y),notabl y higher than pl anned under the Draghi government due to the extension of energy-rel ated fiscal measures in 2023.However,whil e the PMs party continues to gain ground in the opinion pol l s,some pol icy uncertainty remains in the run-up to the 2023 budget l aw.Lowering the

49、effective retirement age woul d prove most costl y,since Ital y facesal ong with Germanyone of the most difficul t demographic outl ooks.Rising sovereign yiel ds,high debt and weak growth highl ight medium-run vul nerabil ities that l eave Ital y on a narrow fiscal path(Exhibit 13,l eft).Exhi bi t 1

50、2:Hi gher ECB Termi nal Rate,Gradual Bal ance Sheet Unwi nd Source:Goldman Sachs Global Investment Research,Haver Analyti cs,ECB16 November 2022 9Gol dman SachsEuropean Economi cs Anal ystSecond,the French government struggl ed to buil d a majority around its 2023 budget and pushed l egisl ation thr

51、ough parl iament without a vote(using Articl e 49.3 of the Constitution).The next l egisl ative hurdl e wil l l ikel y be the pension reform at the start of 2023.The government coul d again make use of Art.49.3 or l ook to buil d an absol ute majority in parl iament.The l atter woul d impl y either

52、cal l ing for earl y parl iamentary el ections or seeking an agreement with an opposition party.As such,we expect the government to seek to l imit pol itical uncertainty and l ook to buil d a broader majority in parl iament to reaffirm its commitment to advancing structural reforms.Third,European fi

53、scal rul es are coming back into focus after the suspension to accommodate a counter-cycl ical fiscal stance during Covid-19.But the European fiscal framework wil l l ikel y be reinstated in 2024 and,l ast week,the EU Commission official l y started the reform process targeting a set of“simpl er,mor

54、e transparent and effective”rul es.The EU communication presented a new three-step process.First,the EU Commission wil l put forward reference debt paths for every Member State.Then,each country wil l present its annual budget committing to a fiscal trajectory(a net expenditure path)consistent with

55、its medium-term debt target.Final l y,the EU Commission and Council wil l be provided with a richer enforcement tool box to better achieve the desired growth and fiscal targets.A simpl e comparison,in the case of Ital y,between the primary bal ance paths impl ied by the current Stability and Growth

56、Pact rul es and a nominal expenditure rul e il l ustrates how the new framework coul d produce a more real istic,and backl oaded,fiscal consol idation(Exhibit 13,right).A Deeper UK Recessi on,Conti nued BoE Hi kes Whil e data revisions now suggest a sl ightl y smal l er UK contraction in 2022H2,we c

57、ontinue to l ook for a deeper recession in the UK than in the Euro area through 2023Q2(-1.7%contraction vs-0.7%in the Euro area).Despite the stronger than expected data flow,growth momentum remains weaker in the UK(Exhibit 14,l eft).Furthermore,tomorrows Autumn Statement is expected to l ead to l es

58、s fiscal support both in the next few quarters and over the medium term.We l ook for the Energy Price Guarantee(EPG)Exhi bi t 13:The Ri sk of Soverei gn Stress Remai ns Source:Goldman Sachs Global Investment Research16 November 2022 10Gol dman SachsEuropean Economi cs Anal ystto be made l ess genero

59、us but more targeted,with subsidies provided to househol ds in the bottom two income decil es.In addition,a broad freezing of tax threshol ds is expected to weigh on growth from Q2(Exhibit 14,right).Further out,we expect the l arge cuts to government spending and a sharper tightening in financial co

60、nditions to keep annual growth bel ow trend through 2026.Despite the sl owing of the economy,the news from the UK l abour market has been firm.Whil e the l atest rel ease showed a smal l increase in the unempl oyment rate,it remains very l ow and wage growth remains significantl y above trend,surpri

61、sing consensus expectations to the upside.As shown in Exhibit 15,the UK and US l abour markets are simil arl y tight.A focus going forward wil l be whether the UK is facing greater suppl y-side issues given the impact of Brexit,and if the high incidence of l ong-term sickness remains the l argest dr

62、iver of economic inactivity,especial l y given pressures in the UK heal th system.Exhi bi t 14:A Si gni ficant UK Recessi on Source:Goldman Sachs Global Investment Research,Bloomberg16 November 2022 11Gol dman SachsEuropean Economi cs Anal ystGiven the tight l abour market,strong wage pressures and

63、firm inflation momentum(Exhibit 16,l eft),we think the BoE needs to take Bank Rate into significantl y restrictive territory despite its dovish rhetoric.The tone of the November MPC meeting supported our view that the BoE wil l more l ikel y than not return to the previous 50bp pace in December.At t

64、hat point,we see the economy cl earl y in recession,fiscal consol idation measures wil l be incl uded in the forecast and other central banks(incl uding the Fed and ECB)wil l l ikel y al so step down their tightening pace.Looking further ahead,we expect another 50bp hike in February,fol l owed by 25

65、bp hikes in March and May for a terminal rate of 4.5%(Exhibit 16,right).Team Europe Exhi bi t 15:A Hot UK Labour Market Source:Goldman Sachs Global Investment Research,Haver Analyti csExhi bi t 16:More BoE Hi kes to Come Source:Goldman Sachs Global Investment Research,BoE,Haver Analyti cs16 November

66、 2022 12Gol dman SachsEuropean Economi cs Anal ystDi scl osure Appendi x Reg AC We,Sven Jari Stehn,Steffan Bal l,Christian Schnittker,Fil ippo Taddei,Ibrahim Quadri and Al exandre Stott,hereby certify that al l of the views expressed in this report accuratel y reflect our personal views,which have n

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