Christophe Coutteau gives us his analysis of the current macro-economic situation.
High inflation in a context of slowing growth
Inflation is expected to remain high in the eurozone over the next few months. It is mostly generated by the rise in energy prices, especially natural gas and electricity. The country most affected is Germany, where a large proportion of energy comes from Russia (55% for gas and 35% for oil).
High inflation, tightening financial conditions and geopolitical tensions are weighing heavily on consumer confidence.
At the same time, real household wages are contracting at an unprecedented rate, which should continue to affect household consumption. Consumption is falling in several countries, notably Germany and France.
Various strategies are being put in place to deal with this situation. Within the euro zone, the European Commission has suspended the budgetary rules until the end of 2023, allowing Member States to put in place measures to protect consumers and businesses against rising energy prices. To this end, Germany has announced a new plan of aid for purchasing power and businesses for a total amount of 200 billion euros, the fate of which is in the hands of the European Commission.
After Q4 and potentially in H2 2023, growth in the eurozone is expected to stall in H2, with a possible entry into recession by Q4 2022 at the latest, leading to a mechanical downward revision of the 2023 outlook.
Rising but volatile interest rates
With inflation not yet peaking in the Eurozone, the European Central Bank (ECB) is expected to be more aggressive in the near term, with an expected 75bps hike in October and a similar hike before year-end.
However, 10-year yields contracted sharply in June, particularly the bund (all rate), which fell from a peak of 2% to 0.60%. They have recently tightened again with geopolitical tensions, rising electricity and gas prices and ECB statements. However, with more mixed macroeconomic figures, the rise in 10-year rates could slow down.
Q3 with two ECB rate hikes should mark a new episode of rate hikes with a still growth context. However, in Q4, the growth/inflation trade-off should be less favorable, and the ECB could review its copy by slowing down rate hikes and stopping reducing its balance sheet. Mechanically, rates could see a further inflection.
Raw material
The economic slowdown, the rise in inventories and the fall in freight costs are all elements that should lead to a clear slowdown in commodity prices, a normalization or even a "marked" fall in prices in 2023 depending on the economic slowdown that is emerging.
In conclusion, the persistence of high inflation will force the ECB to raise interest rates sharply by the end of the year. After this round of rate hikes, with an economy that could fall into recession in Q4 in the eurozone, the ECB could signal a shift in its monetary policy in H2 2023. Commodity prices, excluding natural gas and electricity, should continue to normalize or fallin the coming months with a pronounced slowdown in growth and the entry into recession of certain geographical areas.
Article written by Christophe Coutteau, Business Development Director, MIMCO Capital
