The Euro area economy suggests we will soon see an ECB U-Turn

by Shaun Richards

At the moment it feels like all economic roads head to Europe and the Euro area in particular and for the avoidance of doubt I do realise today is the day the US Federal Reserve is expected to increase interest-rates by 0.75% to a 2.25% to 2.5 range. We can start with yet more signs of trouble on its way.

The downward spiral of German consumer sentiment does not come to an end in July due to rising inflation. While the propensity to buy has only suffered a slight decline, both economic and income expectations have once again fallen significantly. As a result, GfK is forecasting a decrease of -30.6 points in consumer sentiment for August 2022, down 2.9 points from July of this year (revised from -27.7 points). These are the findings of the GfK Consumer Climate Study for July 2022.

This measure has existed for a bit over 30 years and the historical context is below.

This means that consumer sentiment has once again undercut the all-time low reached last month. Since the collection of data for the whole of Germany started in 1991, the current value is the lowest that has ever been measured. “In addition to concerns about disrupted supply chains, the war in Ukraine and soaring energy and food prices, there are now worries about sufficient gas supplies for businesses and households next winter. This is currently causing consumer sentiment to hit rock bottom,”

The worries about the energy situation are not getting any better.


Which leads to this.

German Year-Ahead Baseload Power Price At Contract High Of 385 EUR/Mwh, Up 2.8% ( @PriapusIQ)

So we have a situation where both consumers and producers are being severely affected and that is before we get to the danger of rationing and cuts this winter.

The German Electricity Base Load price for Dec-2022 is trading >500 EUR/MWh and yet the European Comission expects GDP growth to be positive

2+2 = 5 in Bruxelles it seems ( @AndreasSteno)


The French statistics office added this to the mix earlier.

In July, household confidence continued to decline, for the seventh consecutive month. At 80, the indicator that summarizes it loses two points and thus remains well below its long-term average (100 between January 1987 and December 2021).

The next part of the survey is hardly a surprise as this is happening pretty much everywhere.


In July, the proportion of households that consider that the standard of living in France has improved over the past twelve months has fallen again. The corresponding balance lost five points and remained clearly below its long-term average.

The proportion of households that consider that the standard of living in France will improve over the next twelve months is also falling. The corresponding balance lost three points and also remained well below its average.

This is what the Bank of France though at the beginning of July.

In a still highly uncertain environment, hit by the effects of the war in Ukraine and the persistent deterioration in public health conditions, growth in GDP for the second quarter of 2022 is expected to be around ¼% compared with the previous quarter, mainly driven by the rebound in certain market services that were hard hit in early 2022 by the effects of the Omicron wave.

So that would be flatlining for the half-year as GDP fell by 0.2% in the first quarter. Also it is worth reflecting on the fact that the Bank of France expected GDP growth of 0.5% and then 0.25% for the first quarter.


The drumbeat from above has been felt by the Italian statistics office too.

In July 2022, a decrease is estimated in both the consumer confidence climate index (from 98.3 to 94.8) and the composite business confidence climate index (from 113.4 to 110.8).

I have to confess I cannot see how a manufacturing index can be above 100 right now.

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With reference to businesses, confidence is worsening in manufacturing (the index falls from 109.5 to 106.7)

Perhaps it is a measurement issue as the comment implies something very different.

In July, the business confidence index decreased, returning to the level of last May. The worsening is determined by the negative evolution of confidence in manufacturing and market services.
The consumer confidence index also shows a negative trend, reaching a minimum since May 2020.


We finally get some good cheer.


The return of the tourism industry will give Spain a badly needed boost as the lack of it has meant it has been a laggard through this phase.

Euro area Money Supply

In a way this morning’s release starts well.

Annual growth rate of broad monetary aggregate M3 stood at 5.7% in June 2022, after 5.8% in May 2022 (revised from 5.6%).

That is more than average and so over time we would expect nominal GDP to rally. The problem comes as we note that economic growth has struggled for some time so that the growth is likely to be inflation.

Next up and more immediate in terms of its impact on the economy is narrow money.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.2% in June from 7.9% in May.

At first that seems clear because we saw the end of the main QE scheme ( PEPP) in March and the secondary one ( APP) was slowing. Although in practice things are not that simple as the last 3 months growth have gone 10 billion Euros, then 52 billion and now 23 billion. So there is a broad sweep lower but not the immediate impact one might think.

Also there is I think an undercut to this and it is bolstering broad money growth.

while the annual growth rate of adjusted loans to non-financial corporations increased to 6.8% in June from 5.8% in May.

I think that businesses and companies are struggling and are borrowing from the banks. That is good in that they are being supported but beg’s the question of what happens when the banks come to the end of the credit lines they have offered?


I can do this to some extent by quoting one metric which is the benchmark ten-year yield in Germany. I pointed out its post ECB meeting fall on Friday and this week it has fallen further to below 1% (0.95%). What that is telling us is a combination of what they think about prospects for the Euro area economy, because even with inflation expected to remain high they now think that any interest-rate rise in September will be it. So 0.5% interest-rates may be the peak with inflation above 8%. That will keep economic historians in the future busy!

Next up is the use of economic forecasts? The IMF has for example suggested economic growth in Italy will be 3%. If so, how does it have a political crisis? I hope southern Europe does see a tourism boost but that is the only growth I can see. Perhaps like in the first quarter Ireland  can pull a rabbit out of the hat? But even the Irish statistics office no longer believes such numbers as otherwise it would not have created a new one.

Let me leave you with some rare good news for an Italian bank.

Russian crisis not going exactly as expected for EU banks, UniCredit edition: “RUB appreciation has increased equity from €1.9bn to €3.5bn, resulting in a 52bp positive impact on CET1 in Q2”

Hey, SG, how’s that sale for 0 of your Russian sub going? ( Johannes Borgen )

Also it is not what our sanctions were supposed to do.


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