Europe seems to be sliding into a recession after a nearly year-long consecutive reduction in its PMIs. The European manufacturing sector is slowing down and this downturn pairs with China’s current economic sluggishness. The UK seems to be slowing down as well. Relatively, the US seems to be the strongest link, but the US is also showing signs of slowing down with the export data for June coming in rather low. The savings rates in the US are at an unusual low.
Inflation has gone down consistently as of October of last year, but the oil price is still relatively high at around the same levels as when Russia invaded Ukraine (north of $70). The consumption of gas in Germany is going lower than in 2021 and further reductions are forecasted. Previous global oil demand forecasts are also being slashed.
Speculators are predicting the Federal Reserve will be hiking another 25 basis points this week, which may be the last Federal Reserve hike before their anticipated pause. If speculators are wrong, mortgage owners will breathe sigh a sigh of relief, but it may not be of much help to uplift animal spirits in the economy. The ECB’s interest rate stands at 3.5% for deposits and 4-4.25% for lending and a Euribor rate increasing up to 3.72%
At this stage, if the ECB goes higher it would be pushing the limits of what Europe can stand in terms of monetary tightening and it may not be very easy under such economic conditions. Europe has been on a lower-interest regime since 2008 and the relatively high interest rates today in current economic conditions provide for unchartered waters. Ever since the ECB went soft on interest rates, the European economy didn’t go very far. We’re still roughly in the same place we were in 2008 before the crisis hit hard.
Yet, it seems that quantitative easing and low-interest rates did not necessarily serve to create extensive economic growth in Europe but only to save the economy from collapsing further. This is a situation that should make policy-makers think very hard and look at how to address it in terms of fiscal policy while admitting that the ECB alone won’t save them.
Thanks for that Mr Camilleri. A very good assessment