Madrid. After the post-Covid-19 recovery phase, demand for manufactured goods has begun to decline systematicallyMainly affected by weak Chinese demand and high interest rates. However, the demand for services remains stable around the world.
Therefore, European economies most exposed to a weak manufacturing cycle will have the weakest growth. thus, Germany has also joined the club of countries suffering from technical stagnation, while the peripheral countries have managed to move forward. But with inflation continuing to decline, credit conditions improving, and the recent rise in real wages, the most likely scenario looks like a soft landing for Europe as a whole.
but, European growth depends largely on stable oil prices. If energy prices rise in a context of heightened geopolitical risks, fear of inflation would prevent the ECB from easing monetary policy, and Europe would risk suffering a serious recession.
Monetary policy of the European Central Bank
Since the risk of a severe recession is higher for core countries, the ECB may be more sensitive to cutting interest rates sooner if energy prices remain stable. If the Fed delays its rate cutting cycle due to mixed economic signals in the US, we believe the ECB may be the first to cut interest rates.
In the same way, Japan is a manufacturing-oriented economy., which suffers the same consequences and suffers from a similar artistic stagnation. But a late adjustment in wages should provide some support to domestic consumption.
- Currently, the main risks to growth appear to be:
- Energy prices are rising due to geopolitical concerns
- China fails to recover
- Major central banks are reluctant to cut interest rates
Europe and emerging markets remain the economies most sensitive to these risks.. However, our main scenario remains a soft landing, and we are encouraged by the improvement in global manufacturing PMIs on the back of improving credit conditions and interest rate cut expectations.
Laurent Benarroch is a Fund Manager in the Multi-Asset and Overlay team at Edmond de Rothschild AM
