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Week Ahead (30 October)

W/C Monday, 30 October – Spain’s Socialist Party to decide whether to back Sánchez’s Catalan amnesty deal in a bid to form government

This week, the members of the Spanish Socialist Party will have to decide to support a recent deal reached by Pedro Sánchez with other parties that would allow him to continue as prime minister.

Last week, the current acting prime minister reached a coalition agreement with the left-wing party Sumar. However, the support of Sumar’s 31 lower-house MPs alone is insufficient to form a government. To remain in power, Sánchez will need to secure votes from the Catalan pro-independence parties, namely Esquerra Republicana de Catalunya ERC and Junts. These parties have made granting an amnesty for those involved in the illegal 2017 independence referendum a prerequisite for their support. Additionally, they have indicated that their support depends on the possibility of another independence referendum.

Even though this week’s vote does not explicitly mention the controversial amnesty law for Catalan separatists, Sánchez has publicly supported this policy, referring to it as a step toward “coexistence” with Catalonia, changing his earlier stance following the inconclusive election held in July. However, his recent shift has sparked controversy and criticism. Critics, including members of Sánchez's own party, argue that it endangers the rule of law and represents a politically opportunistic move. Public opinion is divided, with recent polling data indicating that nearly 70% of the Spanish population are against the proposed amnesty.

As a reminder, the centre-right Partido Popular (PP) won the most seats (137) with Prime Minister Pedro Sánchez’s PSOE securing 121 seats. Despite coming first, PP underperformed expectations and its path to power was further complicated by the poor performance of Vox, its most likely partner in a right-wing coalition. In September, Feijóo failed to secure the parliament’s support for his bid to form a government, paving the way for Sánchez to try to form his own government coalition. Meanwhile, another election remains a possibility. If Sanchez also fails to secure a majority in the parliament by 27 November, a repeat election will be scheduled in January 2024.

Tuesday, 31 October – Eurostat flash inflation estimate for October, following ECB’s pausing of rate hikes this week

On Tuesday, Eurostat will publish Eurozone flash inflation data for October. In September, Eurozone headline inflation was 4.3%, down from 5.2% the previous month, after peaking at 10.6% in October 2022. This was also the lowest euro-area year-over-year inflation rate since October 2021. Likewise, core inflation in September dropped to 4.5 from 5.3%.

In September the European Central Bank (ECB) raised its inflation forecasts for the next two years, projecting that the headline rate will run at 5.6% in 2023, falling to 3.2% in 2024 and 2.1% in 2025. Nevertheless, following the surprisingly bigger-than-expected fall of core inflation in September, the ECB decided last week to keep rates unchanged at 4%, following 10 consecutive interest rate hikes since July 2022.

With inflation still being significantly above the ECB’s medium-term target of 2%, the release of inflation estimate figures this week will indicate whether core inflation can continue its recent downward trend, increasing the prospects of easing rates next year. Market consensus is that this will not happen before July 2024, as inflation levels are still twice as high as the ECB’s 2% target. In an interview earlier this month, the Bank of Greece governor Yannis Stournaras stated that ‘’if inflation in the middle of next year falls close to 3%, that is perhaps the time to start thinking about a rate cut’’.

Tuesday, 31 October – Preliminary flash estimate of GDP for EU and eurozone in Q3 2023 to be released

Meanwhile, on Tuesday, Eurostat will release its preliminary flash estimate on GDP in the EU and the eurozone for Q3 2023. In Q2 2023, the eurozone economy showed signs of an economic rebound, growing by 0.3%, its sharpest expansion since Q2 2022, despite Germany stagnating (0.0%) and Italy contradicting by 0.3%. However, the European Commission revised downward its own economic forecast in September, predicting 0.8% in the euro area in 2023, down from 1.1% predicted in May. The Eurozone’s largest economy, Germany, is now expected to contrast (-0.4%) this year, whereas its industrial production declined by 2.1% in July.

This week’s release of preliminary data is expected to confirm the market’s expectation of a eurozone contraction in Q3 2023, largely due to weaker consumer demand. Even though the eurozone economy is forecasted to bounce back in early 2024, the volatility of energy prices, the overall geopolitical uncertainty, coupled with the steadily high-interest rates could set the eurozone’s sluggish economic growth in the coming months at risk.

Wednesday, 1 November – Digital euro to enter its 24-month ‘’preparatory phase’’

Earlier this month, the ECB Governing Council announced the digital euro’s move to its ‘’preparatory phase’’, following the completion of the project’s 24-month investigation phase. Launched in October 2021, the investigation phase aimed to address key issues regarding design and distribution. The currency is expected to be introduced in the coming years, in light of the decline in the use of cash. The preparatory phase, which begins on Wednesday, will involve additional experiments and pilot tests over approximately two years.

In June, the European Commission published a legal framework for the digital euro that would serve as a complement to physical cash and included stronger language on privacy safeguards. In general, CBDC enjoys wide-ranging support from all member states, although the initial political enthusiasm has been waning in the last months. Citizens seem to be more reserved about the prospect of its introduction amid fears of the ECB knowing people’s spending patterns and conspiracy theories suggesting digital euros could be used to gather data on European citizens spreading across Europe. In September ECB's Panetta intervened with a letter to clarify that the next phase, previously termed the "realisation phase" and now referred to as the "preparatory phase," does not signal a decision to issue a digital euro, assuring a group of sceptic MEPs that a decision on issuance would only occur after the adoption of necessary legislation by co-legislators.

Thursday, 2 November – Bank of England committee to decide on interest rates; expected to keep them at 5.25%

The Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet on Thursday, with a second consecutive pause in rates priced in.

On 21 September, decided to keep interest rates on hold for the first time in almost two years. The Bank's monetary policy committee voted by a narrow majority to maintain its key interest rate at 5.25%, which was already the highest level since the 2008 financial crisis. This decision came after inflation unexpectedly fell to 6.7% in August, marking a pause in the central bank's most aggressive series of rate increases in decades, which saw 14 consecutive rises since the end of 2021. Nevertheless, inflation remained at 6.7% in September, partly due to a rise in petrol prices, remaining the highest among major advanced economies. Moreover, the UK’s inflation rate is projected to remain above the BoE's 2% target for an extended period, indicating that the Bank will maintain its current interest rates this week, despite the signs of a stagnant economy. Recent data has indicated a decline in employment and continued business weaknesses.

Yet, according to a Reuters survey conducted earlier in October, a majority of economists, specifically 61 out of 73 polled, do not expect the Bank to make any changes to interest rates this week. However, there is uncertainty regarding when the BoE will initiate easing. Market consensus is that this will not happen before the first half of 2024, as inflation levels are still nearly three times higher than BoE’s target.

Friday, 3 November – Deadline for the Commission to respond to Huawei’s complaint about ‘’high-risk’’ vendor designation

On Friday, the deadline for the Commission to respond to Huawei’s complaint about its ‘’high-risk’’ vendor designation expires. Earlier in October, it was confirmed that the Chinese tech firm lodged a complaint against the EU's classification of it as a "high-risk" supplier.

In June, the European Commission and national cybersecurity experts presented a review of its 2020 Toolbox on 5G cybersecurity revealing that a majority of EU governments have not yet enforced restrictions on the use of Chinese 5G equipment. The review also included plans to impose a mandatory ban on using companies that could pose security risks to member states’ 5G networks. In its review, the Commission announced new measures to cut its ties with Huawei and ZTE, including restricting their access to EU research funding and phasing out EU contracts with operators using Chinese equipment. Huawei and its competitor ZTE are considered to pose "materially higher risks" compared to other 5G suppliers, according to the Commission. Huawei filed the complaint with the European Ombudsman, asserting that the comments made by the Commission lacked legal basis, justification, and due process, thus adversely affecting the company's reputation. While the European Ombudsman found insufficient grounds to open an inquiry into the comments themselves, it has requested the Commission to respond to Huawei's complaints by 3 November.

The renewed scrutiny of Chinese tech firms comes as Europe reconsiders its relations with China amidst increased tensions over Taiwan and the Ukraine conflict. It also reflects Western concerns about whether Huawei could be susceptible to influence or infiltration by the Chinese government, potentially compromising critical data in Western nations. Huawei's objection comes in the context of its ongoing battles against restrictions on the use of its 5G equipment in various countries. The UK, Denmark, Sweden, Estonia, Latvia, and Lithuania have already banned Huawei from their 5G networks. On the other hand, Huawei opposes politicising cybersecurity evaluation and states that no court has found them guilty of malicious intellectual property theft.

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