Executive summary
This week we look at three critical issues:
- ECB: Kicking off a cautious easing cycle. At the 6 June meeting, we expect the ECB to initiate a cautious easing cycle by lowering the deposit rate by 25bps to 3.75%, its first rate cut since the Covid-19 pandemic in 2020. This decision comes despite recent upside surprises in inflation and wage data, which will compel policymakers to take a hawkish tone, stressing data dependency and a meeting-by-meeting approach going forward. To not deviate too much from the Fed, which is expected to keep policy rates higher for longer, we maintain our long-held view of only two cuts in 2024 and a terminal rate of 2.5% to be reached in the course of 2025.
- NGEU: The secret to Southern Europe’s economic success? At the halfway point for the disbursement window of the Next Generation EU (NGEU) funds, we find that Southern European countries have best managed to harness this European mane even if disbursements range from 24% in Spain to 52% in Italy. While Southern Europe has seen its economies boosted by booming tourism and country-specific fiscal support measures such as Italy’s Superbonus tax credit, the NGEU funds may have contributed a significant amount to economic growth as well: In the case of Italy, as much as 2pp of cumulative growth over 2021-2023 can be attributed to NGEU, with a similar impact observed for Greece, and somewhat less for Spain and Portugal.
- Airlines: All the way up. Despite sticky services inflation and an economic slowdown, consumers continue to spend on travel. In 2023, 1.3bn people travelled internationally (+33% y/y), while in Q1 2024, international tourism reached more than 285mn travelers (97% of pre-pandemic levels). As airlines continue to face capacity constraints sparked by supply-chain disruptions, safety incidents and the retirement of old aircraft, air ticket prices are expected to remain high. Nevertheless, airlines expect demand to reach an all-time high this year, with global air passengers anticipated to rise by +10.4% y/y and passenger yields to strengthen by +3.2%. This should lead to revenue growth of +6.5% y/y (to USD967bn) and a net profit of USD30.5bn.