This morning has brought us our first update on the economic situation in the Euro after the beginning of the conflict in the Middle East. It comes from a source which we know that European Central Bank or ECB policymakers follow closely with both President Christine Lagarde and Dr. Isabel Schnabel frequently referring to it. Only last Thursday President Lagarde reminded us of this.
We will be particularly attentive to all demand indicators, be it PMIs, consumer confidence, etc.
So here it is.
“The flash Eurozone PMI is ringing stagflation alarm bells as the war in the Middle East drives prices sharply higher while stifling growth. Firms’ costs are rising at the fastest rate for over three years amid the surge in energy prices and choking of supply chains resulting from the war. Supplier delays have jumped to their highest since mid-2022, largely linked to shipping issues.”
As you can see their statement opens with my message of yesterday that inflation is already on the march. It is making its way through the supply chain. Plus something familiar from around 2022 and the Ukraine crisis where supply hits shipping bottlenecks.Next they get onto the consequences for output.
“Output growth has meanwhile slowed to nearstagnation thanks to a slump in business confidence and deterioration of new orders. The drop in future output expectations was the largest recorded since Russia’s invasion of Ukraine in 2022.”
The drop in future expectations rings home more when you see what they think output has already fallen to.
“The survey data are indicative of eurozone GDP growth slowing to a quarterly rate of just below 0.1% in March with the forward-looking indicators pointing to a heightened risk of a downturn the coming months.”
If you project forwards what they are saying then the clear message is recessionary although of course the war needs to continue for the full definition of two contracting quarters of GDP to be achieved. As to inflation estimates at this stage tend to get raised over time.
The survey’s price gauge is meanwhile indicative of consumer price inflation accelerating close to 3%, with cost pressure likely to add still further to selling price inflation in the coming months.
I take these numbers as a broad sweep as the numbers produced are no as accurate as claimed. For example in theory the 50.5 reading today suggests very slow growth but in reality it tells us growth is slowing and if we project it forwards looks set to go negative should the war persist. In the detail there is something else.
Meanwhile, manufacturing production increased modestly, and at a pace that was only slightly slower than that seen in February.
I would think that should the war continue then it will be manufacturing that will be affected the most. For those who like the individual country situation it only really covers the major ones but we are told this.
Output continued to rise in Germany, helped by the fastest expansion in manufacturing production in over four years, but fell again in France. Meanwhile, the rest of the eurozone posted only a slight expansion in activity, one that was the weakest in 27 months.
Maybe the fiscal expansion in Germany is starting to have an impact.
A Good Place
This was the previous view of ECB President Lagarde and during last Thursday’s press conference she spelled it out.
One is: I think we are well positioned, and I would call it the “three times two”. 2% inflation at or around target in the medium term, 2% medium-term inflation expectations, and 2% interest rates. So target, target, broadly neutral. That leads me to say that we start from a good position.
In isolation there is an element of truth here as for example had achieved its inflation target of 2% so inflation was lower than its peers and with interest-rates at 2% again lower. There are two problems. The first is that central bank crowing always ignores the rise in the price level that was caused by the previous inflation whereas in the real world the 2% is an addition to a larger amount. Also that there is something missing which is that they would love to be able to say that economic growth was 2% as well. But they can’t.
During the conference there were a couple of things of note. At a time of crisis Euro area residents might reasonably have expected the meeting to be focused on that.
we also had a very good presentation of climate change impacts on the ocean.
Plus she rather inadvertently contradicted her infamous claim that the cost of living crisis would only be a “hump” and would this soon be gone.
We’re back to the difference with 2022. I think another point that we have to keep in mind is that back in 2022, when the shock hit, inflation was already at 6%.
Also over the years there have been reports of her being very unpopular with ECB staff and she has thrown them under the bus on various occasions as well as blocking a pay rise so something has been going on.
I feel very proud of our staff. That I can assure you, because I don’t think that there are many other central banks that have had the courage to try to cut off at 11 March and produce the set of data that we have had available.
Bond Yields
This is a serious problem for the ECB and we very quickly fail the 2% mantra above with something that they must have assumed could not happen when they bought all those bonds at negative bond yields.
German 10-year yield rises 2 bps to 3.057% ( Market Screener)
That was from yesterday and even after the Trump TACO we have one of 3.01% as I type this. Apart from the impact of a 3% yield let me take you back in time to January 19th 2022.
*GERMAN 10-YEAR BOND YIELD TRADES IN POSITIVE TERRITORY FOR THE FIRST TIME SINCE MAY 2019. ( Investing.com)
Remember when they thought it was clever doing this? Now they have enormous losses on their own books and if we move on there is a problem. If their economies needed negative bond yields and interest-rates in a crisis they now face ones of 3% here. That has an implication for the economic situation before we get to this.
ECB’S KAZAKS SAYS FURTHER INTEREST RATE INCREASES ARE NEEDED “IF INFLATION SPREADS FROM ENERGY” NO MATTER THE CURRENT LEVELS. (@FirstSquawk)
Although others think differently.
ECB must be vigilant in face of stagflation risks, Vujcic says. ( Bloomberg)
For newer readers “be vigilant” means do nothing.
Comment
The achilles heel of the Euro area is of course its energy policy. Because of that vulnerability it keeps having issues.
FT Exclusive: The EU must implement its trade deal with the US without amendments or risk losing ‘favourable’ access to liquefied natural gas shipments from American exporters, Donald Trump’s ambassador to the bloc has warned.
Next up is the basic issue of supply above the price one.
Slovenia becomes first EU country to introduce fuel rationing. (BBC)
The longer the war in the Middle East goes on the more we are going to be reminded of that as it affects economic growth and the cost of living.