Too Hot

Global inflation is finally coming off the boil, but it’s set to remain far too hot for the world’s central bankers. After the worst price shock in decades, the speed at which relief arrives will vary, with Europe in particular still struggling. The major global central banks, which failed to see the pandemic price shock coming, are set to press ahead with interest-rate increases even as headline inflation tops out. The Federal Reserve, European Central Bank and Bank of England are all expected to hike rates again in September. Most of Europe is expected to fall into recession in the coming months as the energy crisis takes a toll over winter.

UK Economy

Goldman Sachs expects the UK economy will slip into recession later this year, with the risk of a deep contraction amid soaring energy costs. The UK’s gross domestic product is expected to fall by around 1% through mid-2023, Goldman said. The forecasts come as data last week showed economic activity weakened from the US to Europe and Asia, reinforcing concerns that rising rates and elevated inflation could tip the world into a recession. The Bank of England already unleashed its biggest interest-rate hike in 27 years and warned the UK is heading for more than a year of recession under the weight of inflation.

Energy Shock

German Finance Minister Christian Lindner said the government needs to address soaring power prices “with the utmost urgency,” as a leading economist warned of a “gigantic shock” looming for Europe’s biggest economy. In an interview with Bild am Sonntag newspaper, Lindner said swift action is required or “inflation will be increasingly driven by an electricity crisis.” Amid warnings of blackouts and social unrest this winter, Europe’s politicians have earmarked about 280 billion euros ($279 billion) to ease the pain for businesses and households, but the aid risks being dwarfed by the scale of the emergency.

Taxer Les Superprofits

French Prime Minister Elisabeth Borne is leaving open the possibility of a new tax on corporate “super profits” after lawmakers rejected the move last month. In an interview in Le Parisien newspaper, Borne said she’d prefer alternatives to a windfall levy, such as companies lowering prices for consumers and giving bonuses to employees to bolster their spending power. Her comments could help fuel fresh calls for an exceptional tax on energy producers such as TotalEnergies. The government will be watchful that companies take advantage of a new law allowing them to give staff more tax-free bonuses, she said. 

Coming Up…

European shares are set to join a global equity selloff sparked by the Fed’s outlook for higher-for-longer rates. Markets are closed in London due to the UK summer bank holiday. Elon Musk and Ukraine President Volodymyr Zelenskiy will speak at the ONS conference in Norway. The Central Bank Research Association holds its annual meeting in Barcelona. NASA has scheduled a test flight for its Artemis rocket system. The US Open tennis tournament starts in New York City. Expected data include Swedish retail sales and Austrian manufacturing PMI. And on top of all that, S Immo and Heico are among companies on track to report earnings.

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(Source: Bloomberg, August 29-2022)