Inflation dents growth prospects (Q3 08)

Our long-held view that the European economy will fare relatively well during the current global economic downturn has come under threat from the surge in inflation in the region. Not only has the squeeze on households’ real income reduced the chances of a meaningful pick-up in the growth of consumer spending, but inflation has forced central banks to tighten policy further even as activity has started to slow more sharply. The relative lack of major economic imbalances should still mean that the region grows reasonably solidly compared to the US economy over the next year or two. But further rises in inflation and corrective action from central banks could lead to a deeper slowdown in the European economy.