SSGA: Alternative optimistic scenario can unfold in eurozone once acute risk period has passed

SSGA: Alternative optimistic scenario can unfold in eurozone once acute risk period has passed

1 augustus 2022

Vooruitzichten Recessie (dreiging)
Outlook vooruitzicht (11) silver lining herstel

State Street Global Advisors’ Simona Mocuta, Chief Economist, and Jeremiah Holly, Portfolio Manager, have published their forecasts for the third quarter of this year:

  • With global monetary tightening in motion amid exceptionally high inflation, the world economy is entering a slowdown. There is a chance of a growth recession or even something worse.
  • Signs of normalization in global supply chains have been modest. Firms are now revisiting such arrangements with an eye on shortening and simplifying them.
  • Risks of further lockdowns under China’s zero-COVID policy reignited worries in Q2 around global supply chains, growth, and inflation.
  • However, June data implied a material increase in activity at the end of the second quarter, indicating a favorable start to the second half of 2022.
  • The circular risks surrounding inflation, interest rates and economic growth create a difficult backdrop for equity markets, even with the negative returns already witnessed year-to-date.
  • The prospects for fixed income are more balanced, but vary dramatically by sector, credit quality and maturity.

About the eurozone, Simona Mocuta says the following:

"The eurozone inflation spike has proven every bit as vicious as the US one. With headline inflation above 8.5% y/y in June, even our recently-upgraded forecasts may prove too conservative. There are also material risks to the sharp moderation expected in 2023.

However, it is important to recall that much more of Europe’s inflation is an energy story, and that is not a neverending upward spiral. In fact, perhaps even more so than in the US, there exists an alternative optimistic scenario that can unfold once the acute risk period (mostly the upcoming winter) has passed. The recent sharp pullback in agricultural commodity prices as Ukrainian supplies are accessed is a reminder that prices can swing widely in both directions.

The European Central Bank has maintained a dovish countenance for much of last year. But in recent months, the intensity of the inflation spike has forced a reassessment and, as of the June meeting, a clear guidance that interest rates will move up in July. We see a total of 125 basis points worth of hikes before the year is done, with additional yet more modest increases in 2023."

 

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