- In the eurozone, economic data remains weak, despite rising inflation and low unemployment. Energy prices are higher than pre-Ukraine levels, while corporate bankruptcies and rising interest rates are fueling pessimism and encouraging consumers to save. Interest rates are likely to continue to rise – and an economy that has been shrinking over the winter is increasingly on the rise.
- Despite some weaknesses, Britain’s economy has remained generally resilient, with consumer confidence rising and retail sales picking up. The Bank of England is likely to raise interest rates again – but that means the peak has been reached.
- The picture in the Eurozone is worrying: economic data confirms a weak Purchasing Managers’ Index, particularly in Germany, the Netherlands and Italy. Britain’s economic growth, on the other hand, is expected to be positive despite some risks. A recession is still looming in the U.S., where economic data appears strong.
Last week, Purchasing Managers’ Indexes (PMI) fell in the Eurozone, the US and the UK. Especially in Europe and the United Kingdom, the index fell below 50 – a clear signal of a contraction in the economy. “Purchasing managers’ indices are closely watched because most experts consider them to be an accurate and timely indicator of overall economic activity,” said Steven Bell, chief EMEA economist at Columbia Threadneedle Investments. But what do other data say and is the risk of a recession really as great as some expect? “Economic growth is at great risk, especially in the Eurozone,” warns the chief economist.
Eurozone: cause for concern
In the Eurozone, many economic indicators were shockingly weak. Despite falling inflation and high employment rates, confidence among consumers and businesses is declining. Bell sees several reasons for this: “Regardless of the downward trend, energy prices are still higher than they were before Russia turned off the gas pipeline. “German companies that rely on cheap Russian gas have lost their competitiveness,” the chief economist said. Although Germany’s unemployment rate remains low and continues to fall, headlines about waves of corporate bankruptcies have spooked both consumers and entrepreneurs. “If interest rates continue to rise, the mood is set for doom and gloom,” Bell summarizes.
According to the chief economist, lack of confidence means consumers are less willing to touch the capital they have saved during the Covid crisis. There are exceptions: for example, in Spain, retail sales are growing. “But it proves fate,” Bell says. In view of inflation above the European Central Bank’s (ECB) two percent target, Bell is convinced: “Key interest rates are likely to continue to rise – and the prospect of an economic contraction over the winter is becoming an increasingly realistic scenario. , even so, the unemployment rate will rise only marginally.”
UK: Consumer confidence is on the rise
Surveys of purchasing managers point to weakness in the UK, particularly in the previously buoyant services sector. “However, the data overall proved robust,” Bell observes. Unlike the Eurozone, consumer confidence appears to be recovering in the UK and there are signs that retail sales will pick up in the autumn. Nevertheless, there are still challenges: “With each new week, more mortgages are renewed at higher interest rates, house prices may fall further, and we expect unemployment to increase,” the chief economist admits. But let’s not forget that mortgage interest rates have fallen significantly from their highs in early July. Real income is gradually rising as inflation falls. “The Bank of England may raise key interest rates again – but then the tightening of monetary policy will end,” Bell believes.
Buying managers’ indices are indicators of expectations. They are closely watched but have once proven to be more pessimistic about economic growth. “Unlike the UK, however, weak PMIs in Europe are reflected by economic data. This is particularly true for Germany, the Netherlands and Italy,” Bell insists – a troubling picture for the chief economist at Columbia Threadneedle Investments. But Great Britain’s economy is not out of the woods yet, and there are certainly risks. “However, if I am right and inflation continues to fall, so will consumer confidence – so economic growth will remain weak, but still in positive territory,” Bell says optimistically. The chief economist believes the likelihood of a U.S. recession is slim: “While student loan repayments may cause a brief hiccup, general economic fundamentals appear solid,” Bell concludes.
Watch the original commentary with video by Steven Bell here.
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