Mortgage demand has also been shrinking across the continent as banks tighten lending criteria and restrict the supply of credit to the economy.
Economists at Nomura are predicting a significant recession in the eurozone, with GDP shrinking by another 0.5pc in the final quarter of the year and 0.3pc in the opening three months of 2024.
Perhaps what is more worrying is that they do not forecast a return to growth until the third quarter of next year.
Erik Nielsen, economist at Unicredit, says: “The odds are that the ECB has done too much” as shown by the latest data “which has inflation dropping very rapidly before a whole lot of the monetary tightening has started to bite, along with the fact that growth is now turning negative”.
In terms of the scale of over-tightening, Nielsen fears that along with the failure to clean up banks after the financial crisis and the sovereign debt crunch a decade ago, “the size of the ECB’s tightening may go down in history as the third European policy mistake during the past 15 years”.
Anna Stupnytska, economist at Fidelity, also raised concerns that “it might be a bit too much for the economy to take if rates stay at this level for the nine months-plus that the ECB is signalling”.
If the ECB persists, “the implications could be a deeper recession” she says, “but they are probably willing to sacrifice growth because they are so focused on inflation”.
Stupnytska expects Lagarde will be forced to cut rates much earlier than planned, potentially as soon as spring.
For her part, Lagarde has already recognised the impact on the economy.
At last week’s press conference, she said the “economy is likely to remain weak for the remainder of this year”.
She said: “The risks to economic growth remain tilted to the downside. Growth could be lower if the effects of monetary policy turn out stronger than expected. A weaker world economy would also weigh on growth.”
But none of that appears to have shaken her resolve to keep rates high.
The ECB president indicated it will be well into next year before the topic could come up for discussion as policymakers need to watch developments – such as collective bargaining agreements which set future pay rises.
“Even having a discussion on a cut is totally premature,” she said.
