Will spring come for the economy in Europe and the UK?
We don't expect a boom in Europe, but recession fears have eased and 2023 should see steady growth in the UK and across Europe. However, high mortgage rates continue to be a headwind for the UK. Steven Bell's analysis
In recent weeks we have seen an improvement in the macroeconomic environment in the UK and Europe. This scenario is largely due to the fall in natural gas prices. There is a real possibility that inflation will fall below 3% at the end of this year, both in Europe and in the UK. As fears of skyrocketing energy prices fade, confidence should rise and spending will rise. So far, the signals received have proved to support such a scenario.
Economic data was much stronger than expected in both the UK and the euro area. Despite concerns over the credit crunch in the US and UBS's takeover of Credit Suisse, there were no bank runs in the UK or Europe, and worries about Deutsche Bank also eased.
INFLATION DOWN IN EUROPE AND THE UK
Inflation has already fallen significantly in the euro area – the latest figures suggest 6.9%, down from a peak of 10.7% in October 2022. Progress has been much slower in the UK UK, where inflation remains above 10%, but we think it's only a matter of time before it collapses here too. The factor we expect to bring additional momentum over time is related to consumer spending in Germany. Consumer confidence has overall increased, real incomes are rising, energy bills are falling and there is still plenty of unspent cash available after generous fiscal support during the pandemic.
THERE WILL BE NO RECESSION
Obviously we are not talking about an economic boom. But the widespread fear of a recession that arose last autumn proved unfounded and we expect to see slow and steady growth in both Europe and the UK in 2023. One of the major headwinds for the UK today is rising mortgage rates. The latter have also increased in Europe, but the impact is strongest in the UK, partly because mortgage rates have fallen so much, but also because turnover in the UK housing market is higher than in many other European countries.
This has important consequences for monetary policy. The European Central Bank can be satisfied that headline inflation has eased; however, core inflation has not declined and wage inflation is accelerating. As the growth outlook improves, we expect the ECB to continue raising rates. If, as we expect, the US enters a recession later this year, US rates could fall below European rates, which would be quite a dramatic change. Given all of this, the euro and the pound could continue to strengthen against the US dollar. Although we believe that any rise in the pound will still be limited by the drag on the economy from mortgage rates, which means that the Bank of England may not raise rates further. Overall, with a better economy, even European stocks could outperform their US counterparts.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/europa-regno-unito-economia/ on Sat, 15 Apr 2023 05:17:23 +0000.