The most predicted recession ever is not coming at all. At least, not in Europe. According to DWS, the record-negative figures do not correspond to the actual state of the economy. “We expect growth, not contraction.”
In Germany, the difference between the yield on two-year and ten-year government bonds widened to -27 basis points in early trading on Friday and then rose to -21 bps. The fact that the yield curve of the Eurozone’s largest economy thus reached the deepest inversion since 1992, and will therefore, according to consensus, fall into recession within 12 to 18 months, is no reason for DWS to panic.
Indeed, the asset manager with over 830 billion under management is positive about the economic prospects of the eurozone and Germany in particular. The extensive support measures and continued low unemployment make a long and deep recession very unlikely in the short term, said Martin Moryson, chief economist Europe at DWS.
Negative numbers don’t match actual output
“Those record negative figures do not correspond to actual output and consumption,” Moryson said. Unlike many peers, he does not expect contraction but even growth for the eurozone as a whole. Especially in Germany, he said, the situation is much better than sentiment indicators show.
Sentiment ‘overly negative’
The reasons for the negative sentiment among consumers can be found in both the demand and supply side, according to DWS. The unrest stems mainly from the energy crisis.
Moryson: “But now it appears that we are getting through the winter just fine: gas stocks have been replenished, new energy suppliers have been found and demand has fallen. German industry, for example, consumed 20 per cent less gas last quarter than normal. Economic activity slumped only 2 per cent and despite gloomy market sentiment and high inflation, economic growth last quarter was driven by consumption.”
Growth, not contraction
Last week also showed that German business confidence, unlike consumer confidence, recovered faster than expected. The Ifo index - a leading indicator of economic activity in Germany - rose from 84.3 to 86.3 points this month where analysts were counting on a recovery to 85 points. With this, German entrepreneurs see the future as slightly less gloomy.
S&P Global research last week showed that sentiment among purchasing managers in the eurozone as a whole also did not deteriorate further this month as economists had predicted, manufacturing CPIs showed. Nevertheless, the European and German composite CPI are still below the 50-point threshold that separates expansion from contraction.
Still, DWS is more positive than the general consensus. The European Commission lowered its growth forecast for 2023 from 1.4 per cent to 0.3 per cent. The market expects a contraction of 0.1 per cent for Europe next year. In contrast, Moryson expects growth of 0.5 per cent for Europe. For Germany, the economist sees stagnation rather than the -0.7 per cent the market expects.
ECB
Whether, and how soon, the eurozone will slip into recession depends heavily on the interest rate policy of the European Central Bank, which is currently trying to cope with inflation with interest rate hikes that could slow down the real economy.
Investors are counting on an interest rate hike of 50 basis points in December. That is lower than the 75 basis points of the past two policy meetings, as the market expects inflation in the eurozone to peak soon. The spike in inflation would be caused by a slowing economy, read; an upcoming recession.
Last week, ECB vice-president Luis de Guindos and German board member Isabel Schnabel already hinted that a slowdown in the interest rate path taken is unlikely. Inflation will be brought back to the medium-term target of 2 per cent despite the high probability of a recession in the eurozone, De Guindos said.
On the size of the December interest rate hike, he did not elaborate. That will depend on the upcoming ECB forecasts and inflation data in November, according to de Guindos.
Schnabel, board member and former economics professor, said: “The data coming in so far suggest that the scope to slow the pace of interest rate adjustments remains limited, even though we are approaching the estimates of the neutral rate.”
This article originally appeared in Dutch on InvestmentOfficer.nl.
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