Global economic outlook darkens
The UK economy may be in bad shape, but economic indicators across the world’s major economies are also flashing red.
The outlook in the eurozone is darkening, with the euro dipping below parity with the dollar today at $0.99 – a 20-year low. The euro has lost 12.8 per cent of its value against the dollar this year as inflation squeezes consumers and firms, and the likelihood of a eurozone recession increases.
The bloc is facing the highest inflation rates since the euro came into being, stoking anxieties of a Europe-wide downturn. Annual inflation in the euro area was 8.9 per cent in July 2022, up from 8.6 per cent a month earlier.
Traders are betting that the US Fed will stay hawkish on inflation and raise rates by another 0.75 percentage points next month. The European Central Bank, by contrast, is hampered by slower eurozone growth and won’t be able to match the Fed’s rate rises.
At the root of the increasingly gloomy sentiment is concern about a European energy crisis. Gazprom, the Russian gas monopoly, announced a three-day closure of the vital Nord Stream 1 pipeline for unscheduled maintenance yesterday, spooking markets and sending the wholesale price of gas soaring by 37 per cent to its highest level since early March.
Whether or not maintenance is the real reason for the closure of the Baltic pipeline, it highlights just how vulnerable the continent is to Moscow’s energy blackmail.
The FTSE 100, the European Stoxx 600 share index and Germany’s Xetra Dax all lost 0.3 per cent in early trading following the Nord Stream announcement.
It’s particularly bad news for Germany, Europe’s largest economy, which seems to be heading for recession this year after recording its worst economic output since July 2020.
Germany’s flash purchasing managers’ index (PMI) – a gauge of growth – dropped to 47.6 in July from 48.1 in June, below the 50 mark that separates growth from contraction.
Even the world’s economic powerhouse, China, is feeling the heat. The IMF cut its forecast for China’s 2022 GDP growth by a quarter to 3.3 per cent last month. It would be the slowest pace in four decades – ignoring the 2020 Covid dip – and well below the government’s 5.5 per cent target.
Yet because it isn’t hamstrung by inflation like most of the world, China’s central bank had the wiggle room to cut interest rates on Monday.
Back in the UK, City traders are betting the Bank of England will be forced to hike the cost of borrowing from 1.75 per cent to 4 per cent next year in response to 40-year high inflation, despite the risk of recession. Like the euro, the pound is also down 13 per cent against the dollar since the start of the year.
With inflation to the left and recession to the right, the word economy is just about staggering on.