Financial markets are anticipating a further sharp fall in inflation and interest rates in the eurozone.
However, we prefer another scenario: the emergence of stagflation with weak growth and persistent inflation.
Growth in the eurozone will be weak, due to an ageing population, lack of productivity gains, and low levels of R&D spending and investment in new technologies.
Underlying inflation will remain well above 2%, with the absence of productivity gains, the decline in the working-age population perpetuating tensions on the labor market, and the conflict over income sharing between employees and companies.
As a result of this stagflationary situation, the potential for interest rate cuts is limited if the ECB maintains an inflation target of 2%.
