The four main euro economies hold their breath to avoid a recession

"Europe is headed for recession." This is the reading of Yacine Rouimi, chief economist at IHS Markit, with whom Tej Parikh, his counterpart at Fitch Rating, aligns, for whom "the risks of red numbers in the eurozone's GDP have increased due to fear of cuts in looming Russian energy supply, which is already manifested by the disruptions in the flows of the Nord Stream 1 pipeline. His colleague Jens Eisenschmidt, at Morgan Stanley, also puts on record in a note to investors that the monetary partners will go into contraction in the fall and into a "technical recession" – two consecutive quarters at negative rates – in winter to resume dynamism in the spring. of 2023 driven by business investments.

These three sample buttons of the stormy summits that threaten the European situation after the summer period, they synthesize the voices that warn that the summer quarter is just a kind of truce-trap, because the start of the ECB rate hikes undertaken this week – of no less than half a point, the option least expected by the market– could bring another equally severe financial constraint in September. Judging by the ammunition reserve – of another half-point caliber – that the monetary authority claims to be willing to approve in two months to address the hot geopolitical, energy and monetary fall. More wood to quell inflation in the eurozone which, in June, marked a rise of 8.6%.

Various indicators reveal the first signs of a slowdown in household spending, a drop in confidence in both consumer and business barometers, as well as a sharp slowdown in the manufacturing sectors; especially German.

Eisenschmidt sees rates at 0.75% by the end of this year, "if the economic climate does not deteriorate further from the gas embargo or spiraling prices." Rouimi delays the contraction of the euro zone throughout 2023, when the springs of inflation, rising rates and energy flows to Europe will be tightened.

Despite the fact that "some GDP parameters such as the tourism industry are increasing their demand this summer", they will end up being affected by energy and inflationary threats, warn IHS Markit, whose consensus at the end of June placed the rise in GDP of the euro at 2.5% this year and 1.5% in 2023; three tenths and a half point respectively below the market average. Some forecasts in line with the recent summer prediction of the European Commission, which adds one tenth to this year (2.6%) but removes it for the following.

Even so, diagnoses emerge contrary to the collapse of the euro's GDP, interpretations that believe that the ECB "will not raise rates so much as to push the economy into the abyss" or, at least, to avoid that, if there is an episode of contraction, correct your roadmap and avoid income in the red. This is the opinion of Aila Mihr, an economist at Danske Bank, who points out the possibility of “a recess at the end of the year that, however, will not prevent inflation from extending too far from the 2% limit until well into 2023”. The Bloomberg consensus has just increased the chances of a recession in the eurozone next year to 45% from 30% in June, but the bid to avoid the red numbers still dominates.

The drums of crisis in Europe resonate due to the inflationary loop, the decline in the purchasing power of families, the industrial slowdown and the end of the budgetary collection aimed at stimulating the economies, which leaves the ECB facing the harsh affront of accelerating or slowing down the pace of rising money. The Conference Board emphasizes that the recession can still be overcome due to the "strength shown by their labor markets and the signs that corporate investment projects will follow their planned road maps." Ilaria Maselli, its chief economist, is eager to see the bottle half full. “Companies have an important decision to make: either they postpone capital decisions due to geopolitical tension and the looming energy shock, or they incentivize and fuel their innovation plans to reduce their productive dependence” on factors exogenous to the euro zone .

But how are the four most important partners of the euro facing this double dilemma, monetary and economic? Faced with visions such as Maselli's, which rely on the "surprise of productivity and demand" as tools for the rescue of the euro area in 2023, the German, French, Italian and Spanish conjuncture offer ambivalent signs due to the various degrees of connection with Russia, the rhythms of its GDP and its various productive engines.

Germany, the locomotive keeps idling. After gripping in the last stretch of 2021 by registering a contraction of seven tenths due to the confinements of the omicron variant, the modest rebound of 0.2% between January and March suggests that the largest economy in the euro, with inflation of 8.2% and its historical aversion to price increases, sailing with a seized engine.

In an atmosphere of great concern, it has activated level two of the energy alarm of the three contemplated, although it has not yet considered taking a new leap to intervene in the market. Uniper, the largest importer of Russian gas, has just claimed the rescue for not being able to pay the urgent loan of more than 2,000 million euros that it had to request months ago from the federal bank KfW, a kind of German ICO. In addition, there are fears of the collapse of entire industries due to the gas bottleneck that permanently endangers aluminum, chemical and manufacturing companies.

The Conference Board admits that the industry made in Germany "is under stress" due to the increase in production prices and energy cuts. Even investment, the big contributor to poor German GDP growth in the first quarter, could succumb to the geopolitical barometer. Now, not so much as to seal a recessive year. The bet is for a slight rise of 1.2% that would explain the prospects of short recesses that have been installed in the market in the event of a particularly heated autumn with a possible cut in the Russian energy flow. This panorama is shared by the IMF, which believes that it could cause GDP declines of 2.8% in the next twelve months, and two of the large research institutes –Ifo and IfW–, who see “less growth with too much inflation”.

France, the closest to stagflation. Gallic GDP remained flat between January and March. However, for The Conference Board, its services sector will maintain its pulse until reaching an increase of 2.4% this year; yes, at the cost of leaving a point in 2023. France has the best inflation rate of the four major monetary partners, which ended June at 6.5%. Daniela Ordóñez, from Oxford Economics, highlights that French service companies continue to show signs of relative vitality, despite losing steam in June, with a tendency to "become stronger in the summer months".

The Governor of the Bank of France, François Villeroy de Galhau, has summed it up eloquently: “Activity is not brilliant, but it is resilient.” The French regulatory body gives its economy a growth of 2.3% in 2022 and a slight rebound of 0.25% in the second quarter in its latest prediction. While its chief economist, Olivier Garnier, says he is confident that price tensions will begin to loosen to see declines in the CPI in 2023. A short and manageable space that, for the head of Finance, Bruno Le Maire, would put an expiration date on the increase in company prices to save their fiscal years.

Italy, in the spotlight of the markets. The transalpine political crisis, which looked like a bomb with a controlled detonation, will end the era of Mario Draghi as tenant of Palazzo Chigi and with a new call for elections. The third largest economy in the eurozone began the year with a contraction of one tenth, which was subsequently corrected upwards, until registering a rebound of 0.2%. But Russia's second-largest energy client in the monetary area and the largest recipient of Next Generation funds loses a prime minister who had stood as the banner of sanctions against Moscow, instigator of an ECB that announced it had methods to contain market speculation in the risk premiums and which, as the former European monetary authority, has put Frankfurt on alert as to whether a rise in interest rates will not lead to a recession for the euro-club and for its country.

Reasons were not lacking, given that Italian inflation has shot up to 8.5%, one tenth below the eurozone average, and, with it, industrial costs have slowed down the momentum generated by community resources. Despite the political crisis, Italy is trying to cushion the pressure on the sovereign bond market, diversify gas purchases towards Algeria and relaunch tourism this summer as a soothing effect in the face of the institutional storm.

However, the great stumbling block for Europe will be access to credit, explains Max Castle, manager at Mediolanum, which "will be increasingly complex and visible" and Italian companies are among those that will bear the worst the abandonment of the debt purchase program corporate of the ECB.

Spain refuses to fall. The summer places the fourth power of the euro among the most dynamic in the eurozone, according to the Commission, with a rise of 4%. Despite the fact that the BBVA study service speaks of a contraction of half a point in the final months of 2022.

"Tourism has exceeded the best expectations," says Carlos Cuerpo, head of the Spanish Treasury, who does not rule out an improvement in economic forecasts due to the vitality of this heading, which is so transcendental for the health of the Hispanic situation. For Body, in statements to Bloomberg, this jump of tourist dynamism reveals that health restrictions are no longer on the collective mind of visitors and that they have accepted price tensions.

Exceltur, the employers' association for tourism agents and businesses, predicts that the sector will generate €152 billion in revenue this year after returning to pre-COVID-19 employment levels in June. María Romero, from AFI, clarifies with a "reconfiguration of consumer spending" at the end of the summer period.

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