Europe's sleepwalking into their latest crisis. Chatter about a more aggressive balance sheet unwind (QT) from the ECB and ongoing rate rises is at odds with the economic data...
While prepping for an interview on Bloomberg Arabia today I came across this chart 👇
And these headlines 👇
The divergence between the Eurozone economic surprise index and its US and G10 counterparts over the year to date stopped me in my tracks. To be honest, it looks even worse on the 5-year chart of the same data.
As for the headlines out of Italy... That’s a combination that smacks of deflation, not something that one would have expected to find in a region where interest rates are still rising.
Coincidentally Dutch bank ING wrote about European industry today saying that
“Industrial production growth in Europe has more or less stagnated since late 2020 as the speedy recovery that followed the first round of lockdowns came to a halt.
At the same time, the sector is in an incredible state of flux; structural changes around energy and trade are providing substantial challenges for businesses”
The bank also shared its forecasts for industrial production by country out to 2025... 👇
Italy is by far the weakest component this year and though the Italian economy is forecast to rebound in 2024 & 2025, the predicted recovery looks very pedestrian compared to Poland.
Though we should note that Poland is not yet a member of the Eurozone and retains its own currency.
ING lays the blame for the poor performance of much of European industry at the door of structural problems across the continent. Not least of which is energy supply.
Yes European Natural gas prices are well below their 2022 peaks but they are also +38% over the last month.
As ING put it:
“it would be naïve to assume that structural problems with the European energy supply will not re-emerge. While futures prices remain relatively benign for the foreseeable future, the case for more volatile and even structurally higher energy prices in the eurozone seems pretty solid. It’s just the degree to which this will occur that is key here”
Falling energy prices are behind the sharp drop in Italian inflation including the PPI data that was out today.
ING points to another structural issue confronting European industry. The inability to diversify the supply chain as quickly as peers in other advanced economies.
In particular the US which is reducing its dependency on China, but the Dutch bank see relatively little diversification of supply within the EU.
The chemical industry is struggling. BASF was first...
More recently, Lanxess drastically cut their outlook 👇
German speciality chemicals maker Lanxess slashed its second-quarter and annual core profit forecast, saying it saw no demand recovery in June as customers continued to destock, sending its shares plunging 16% to a three-year low on Tuesday.
Weak demand, especially in the construction and electronics industries and from consumer-related products, along with customer destocking had spilled into the second quarter from the first and were ongoing, the company said in a statement late on Monday after the market close.
Then we come to another millstone around the Eurozone’s neck. The issue of money transmission.
European banks have been notoriously poor at lending money to both households and consumers, even when the ECB has specifically provided funds for that purpose through its LTRO and TLTRO operations.
The annual rate of growth in corporate borrowing has fallen to 4.0% in May, down from 4.6% reported in April.
Annualised growth in lending to the private sector, across the Eurozone, as recorded by the ECB, fell to 2.1% in May, down from 2.4% recorded in April.
What's more, the Eurozone money supply is contracting, none of which bodes well.
No surprise then that the Eurozone slipped into technical recession earlier this year.
The most recent composite PMI print for the single currency area was a dull 50.3, the weakest print for 5 months and well below forecasts for 52.5.
A drop in new orders and a slowdown in employment growth were behind the low ball number which is only marginally above the 50 level that separates contraction from expansion.
Quite why European stock markets and sectors have enjoyed such an ebullient first half of the year against this sober economic background is an open question...
Their exposure to the global economy can only be part of the answer.
Q1 2023 earnings in Europe were largely ahead of expectations with 67% of Stoxx 600 companies, that have reported so far, delivering a beat. The biggest upside surprises coming from technology, utilities and industrials.
Whether that can continue into Q2 remains to be seen...
Data from the IFO survey paints a grim picture of the path ahead...