Because the new ECB rate hikes will be a disaster for the economy
The rate hike by the ECB, which is announced as likely on Thursday, risks turning out to be a disaster. Here because. Giuseppe Liturri's analysis
Bad start to the quarter for the eurozone economy and a soft landing in the US. This is the synthesis that comes from reading the PMI index, the usual survey published by S&P Global carried out among the purchasing managers of a sample of companies.
HOW IS (BAD) THE EUROPEAN MANUFACTURING SECTOR
The July data for the Eurozone betrayed expectations downwards, showing a worsening of the contraction underway for months in the manufacturing sector (from 44.2 to 42.9) and a downsizing of tertiary activities (from 52 to 51.1) which so far had supported the composite index which slipped decisively into negative territory (from 49.9 to 48.9).
It should be remembered that for these indices, 50 constitutes the threshold that separates expansion and contraction of the economy compared to the previous month and generally then finds correspondence in the trend of the GDP, the final data of which we will read in a few months.
Demand is stalling and as a result companies are already seeing a significant drop in the order book and the size of the phenomenon is so significant that it only had precedents in 2009 (excluding the lockdown period). Similarly, expectations for the future and confidence have declined significantly. The effects on employment are already beginning to show, with the slowdown in hiring.
Significant negative effects also on the level of inventories, which companies have begun to reduce to adapt them to lower production needs.
PRICE INCISES ARE A MEMORY
The impact on the price trend was immediate. The rises of the past are now a thing of the past. In both the purchase and sale phases, theinflation recorded by the sample stood at the lowest level in the last 3 years. Even in manufacturing, the contraction in prices finds precedents only going back to 2009.
In services, the changes in purchase and sale prices continue to be higher than the long-term average. However, it is confirmed that the increases are decreasing with growth rates returning to the levels of 2021.
THE SITUATION IN FRANCE, GERMANY AND THE UNITED STATES
This figure at the eurozone level can only find its origins in the data of Germany and France , which take on truly negative contours. In France, the contraction continues and worsens, both in manufacturing and in services, with an intensity that is the worst since 2013. Germany surprises on the negative side with the strong contraction in the manufacturing sector, to an extent never seen since 2009 (excluding the lockdown), while the services sector remains in expansive territory, albeit at a very modest rate. The summary is that the composite rate of the two sectors ends up in contraction for the first time since January.
In the face of this gloomy picture, the same data arriving from the USA stand out. Where the composite index marginally retreats from 53.2 to 52, as a consequence of the drop in the services sector from 54.4 to 52.4 and the surprising expansionary figure for manufacturing (from 46.9 to 50.2). The outlook index rises to 49 from 46.3, while in the Eurozone it fell to 42.7 from 43.4. A gap that speaks for itself. However, in the USA, price indices are struggling to fall. The slowdown overseas is evident but it concerns the growth rate, whereas in the Eurozone the rate of contraction is increasing. Here is all the difference.
Investors have reacted dramatically to these data since the early hours of yesterday, repositioning themselves on the dollar and bringing the exchange rate back to the levels of two weeks ago. The government bond sector also reacted to the prospects of modest growth or very probable recession in France and Germany, with the 10-year BTP falling by almost 4%.
THE ECB RISKS TO MAKE A DISASTER
If this is the picture, the rate hike announced as likely for Thursday by the ECB risks resembling the two disastrous hikes made by Jean Trichet in July 2008 and July 2011, with the recession already underway.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/bce-nuovi-aumenti-tassi-conseguenze-economia/ on Tue, 25 Jul 2023 09:08:17 +0000.