European Economy: Steady Growth and Inflation Near Target Continue

■ Domestic manufacturing orders in Germany have begun to rebound, and the positive spillover effects of fiscal stimulus on industry may already be evident. 

■ Against the backdrop of a robust economy and inflation near the target, the European Central Bank (ECB) is expected to maintain its current policy stance for the time being. 

   The Eurozone is maintaining a moderate expansion overall. Data released by Eurostat on the 6th showed that Eurozone retail sales rose 0.2% month-on-month in November, above market expectations, and the October data was also revised upward (flat month-on-month → up 0.3% month-on-month). As a result, retail sales have surpassed the record high set in November 2021. Although the growth rate is still moderate, it shows that personal consumption is continuing to recover. By country, France (up 0.5% month-on-month), Italy (0.3%), and Spain (1.0%) performed steadily, while Germany (down 0.6% month-on-month) saw a significant decline. 
However, even in Germany, where the economy has been sluggish, some positive signs have recently begun to emerge. Data released on the 8th showed that Germany's manufacturing orders index rose sharply by 5.6% month-on-month in November, marking the third consecutive month of significant growth. Even excluding large orders (such as aircraft), orders still increased by 0.7% month-on-month, maintaining positive growth. Structurally, the growth did not come from overseas orders but from an increase in domestic orders. Although the level of domestic orders in Germany remains low, it has recently shown an upward trend, indicating that the positive driving effect of fiscal spending on industry may be emerging. 

   Regarding inflation, it remains relatively stable overall, close to the European Central Bank's target level. Given the robust economic growth, the European Central Bank is expected to maintain its current monetary policy stance. The Eurozone Consumer Price Index (HICP, preliminary value) released on the 6th showed that the overall HICP rose by 2.0% year-on-year, while the core HICP, excluding energy, food, alcohol, and tobacco, rose by 2.3% year-on-year, both down 0.1 percentage points from the previous month. 
Looking at the components of core inflation, the increases in core goods prices (up 0.4% year-on-year) and service prices (up 3.4% year-on-year) both slowed by 0.1 percentage points from the previous month. Core inflation momentum (the three-month moving average annualized growth rate relative to three months prior), calculated using seasonally adjusted data released by the European Central Bank, shows that the core HICP fell from approximately 2.5% in the first half of last year to 2.1% in December, indicating that underlying inflationary pressures have been easing since the first half of last year. 

   This change is mainly due to a decline in core commodity prices (from a year-on-year increase of 0.6% to a year-on-year decrease of 0.2%). Previously, the appreciation of the euro and the US-China trade friction led to Chinese goods shifting from the US market to the European market, putting significant downward pressure on commodity prices. On the other hand, service prices (from a slight year-on-year increase of 3.5% to 3.4%) showed unexpected stickiness due to persistently strong wage growth pressures. According to the ECB's wage tracker, agreed wage increases are expected to slow from 4.5% year-on-year in 2024 and 3.3% in the first half of 2025 to approximately 2.5%–2.7% in 2026. 

   Overall, with the combined effects of commodity price deflation and the normalization of wage growth leading to a slowdown in service prices, the underlying inflation rate is likely to remain slightly below 2% in the medium term. However, the risk of wages accelerating again and thus pushing up inflation remains one of the important uncertainties that need to be monitored.