The general impression we had from Christine Lagarde is that they are genuinely in data dependent mode, more worried than in December about the state of the real economy and more comfortable about inflation, writes AXA IM Group Chief Economist and Head of Research, Gilles Moëc about the ECB meeting last week.

It may be that the central bank may start to be quite concerned about the deterioration in cyclical conditions in the Euro area, despite Christine Lagarde’s insistence on their recovery scenario into 2024. The “R” word `(recession) was uttered during the Q&A, albeit in some dismissive way – the ECB President implicitly expressed sympathy for the US definition of a recession, which entails, beyond the usual “two quarters of negative GDP growth in a row” a more comprehensive deterioration, affecting in particular the labour market.

Gilles Moëc emphasizes: "we suspect the central bank is in “performative rhetoric” mode and wants to reassure public opinion."

The dataflow is concerning. PMIs must always be taken with a pinch of salt, and they are probably too low in France, an economy which has so far eschewed a proper contraction in GDP, and this is confirmed by the less depressing message from the tried and trusted INSEE survey but in Germany, the signal from the IFO survey is just as negative as the one from the PMIs. The usual engine of European growth is still switched off.

The ECB’s forced optimism on the recovery is predicated on the continuation of disinflation, supporting consumers’ real income. But a lot of this disinflation, according to the central bank, would come from a compression in margins. The key question for 2024, in our view, is whether firms can sustain a decline in their profitability without reducing their workforce? So far, the European labour market has been resilient, but this cannot be taken for granted. If this stops, it is not obvious to us that much of the new-found real income would find its way to spending.