The European Central Bank has managed to achieve a soft landing for the economy, an outcome many regarded as more myth than reality. Inflation has returned to target, unemployment remains at record lows, and economic growth has stabilized. In textbooks, this is described as a happy ending, yet in reality, the market's reaction was limited.
Let us recall the beginning: inflation in the eurozone peaked at 10.6% in October 2022, at which point the ECB apparently remembered that it still had a key interest rate at its disposal. Over the next 15 months, it hiked by 450 basis points, thus ending an eight-year-long experiment with negative rates that, for its duration, seemed like a risky circus act without a safety net. Then, as early as June 2024, Europe took the lead and began to cut rates while others waited. Today, the deposit rate stands at 2%. In theory, a balance is on the verge of perfection. In practice, this has not impressed anyone.
Inflation has stayed strictly within the target range for four months, a recession has not arrived, and employment is holding steady. Christine Lagarde even allowed herself a joke: “Inflation is back at target, and nothing broke within the economy.”
The labor market is holding up as well. Unemployment in the eurozone is just 6.3%, and even France, Italy, and Spain have shown improvement. In the second quarter, GDP grew by 0.1% quarter-on-quarter and 1.4% year-on-year, showing quite a good result. Admittedly, Germany is still experiencing a recession, but the bloc is maintaining balance.
Equity markets are rising, the euro/dollar exchange rate is at a four-year high, and unlike the UK, Sweden, or Canada, it managed to escape the usual pattern of aggressive tightening leading to a recession. Even real wages have recovered, and all of this has occurred without spinning up a dangerous inflationary spiral.
And yet, the audience remains indifferent. In financial markets, disaster sells better than happy endings. Drama outshines statistical resilience. Still, BCA Research reminds us that space for further easing is limited, so the balance of power is changing.
Historically, soft landings are a rare event. The usual example is the 1994 Fed cycle, though even that is debated. Now, the ECB has managed a truly successful version. Still, for some reason, no one is rushing to applaud.
