Inflation in the Eurozone, which stood at 10.6% in October 2022, has decreased to 2.9% in October 2023, sparking optimism among central bankers. Despite initial forecasts aiming for the desired 2% target in 2025, economic activity is expected to decline more than anticipated, influencing the inflation trajectory. Variances in inflation levels among countries are linked to government support measures, whether they've been withdrawn or are still in place, impacting national inflation rates.
Eurozone Labor Market Resilience
The Eurozone's labor market is experiencing its most favorable conditions since the introduction of the euro. The robust recovery post-pandemic has significantly contributed to job restoration, countering the loss of six million jobs. Support measures have increased the labor market participation rate from 62% to 65%, with room for improvement compared to the US and the UK. The ECB's research attributes improved conditions to increased participation by women and extended retirement limits.
Challenges for Banks
Bank profitability faces challenges as the period allowing for a slow transmission to depositors concludes. Three major challenges are looming: the increase in non-performing loans due to economic stagnation, reduced income from low demand for new loans, and higher financing costs due to increased deposit rates. Despite recent profits, the sustainability of bank profitability appears uncertain.
Cyprus' Investment Grade and Challenges
Cyprus achieved investment destination status in September 2023, securing favorable financing terms. However, challenges persist, including an incomplete foreclosure framework hindering mortgage recovery and the exclusion of many borrowers from the credit market. These factors impede the expected decline in the cost of money for Cyprus.
Bank Profitability and Risks
Despite substantial bank profits, they may fall short of covering European banks' capital costs, estimated at just over 13%. The return on equity reached 10% in the first half of 2023, recorded as the highest performance since the establishment of single supervision. European banks face the challenge of absorbing shocks from a rapid drop in asset prices, emphasizing the need for resilience against climate risks and cyber-attacks in the coming period.