Weak ESI

The eurozone economy is slowing rapidly as high prices reduce business activity and dampen consumer demand. We now expect a recession has already started.

Euro zone economic sentiment index (ESI) fell sharply and by more than expected in September. The index fell to 93.7 points in September from a downwardly revised 97.3 in August.

For industry, production expectations dropped sharply in September. Backlogs of work have fallen following new incoming orders turned disappointed. In some industries production dropped due to high energy costs impacted their profitability.

With energy costs still at unsustainably high levels for some industrial sectors, this is adding to the bleaker outlook for industrial production.

Looking at the services sector, confidence fell even more as the post-pandemic pent-up demand is fading. Household buying power is starting to bite. The services indicator dropped from 8.1 to 4.9 as businesses indicate that demand has recently weakened, and they are becoming gloomier about demand in the months ahead.

Stagflation Risk

And the risk of stagflation to remain prolonged is worrying in the euro region. The economy is slowing down. But the selling price expectations are increasing. Businesses are facing higher energy costs due to the spike in prices in August. This is particularly worrying.

As for the ECB, we believe the path is already clear. The central bank is set to hike in the coming meetings regardless of a slowing economy. The increase in selling price expectations will only strengthen that view for the October meeting.

Another 75bps Hike

The ECB is likely to raise interest rates by 75bps next month ahead of a further move in December to a level that no longer stimulates economic growth. There’s a stronger case for front-loading action now.

The price stability i.e., inflation is 2% in the euro area, but is expected to rise to a new record of 9.7% in September data.

The ECB has raised its deposit rate at its past two meetings from minus 0.5% to 0.75% in an effort to tackle record eurozone inflation. But it still remains below the neutral rate, which is estimated at 1%- 2% in the euro area.

Source: AmInvest Research - 30 Sept 2022