The eurozone’s better than expected services PMI could suggest that the European economy is on track for growth.
The services sector, of course, suffered the most from covid, and its recovery would be a strong sign of improvement over the impact from covid.
The implication is that European consumers are still willing to spend. We could get confirmation of that theory tomorrow when the eurozone will report its August Retail Sales data.
The importance here is in the context of rising inflation. Several EU officials have acknowledged that inflation is a problem. However, in the most recent meeting of Financial Ministers this week, including Lagarde, they all agreed that inflation will be transitory.
We’ve all heard that before
European policymakers are banking on inflation being higher for the rest of the year, but returning to a more modest level next year.
This implies that monetary and fiscal policy is likely to stay on track. With less inflation pressure, the ECB is in a better position to keep the liquidity flow going. This is also likely to keep the euro relatively weaker to other currencies. Other nations’ central banks will have to pull back on easing to deal with rising inflation.
Nonetheless, part of this evaluation that European officials are making is based on some circumstantial evidence, and they publicly acknowledge it.
The rising cost of energy across the continent has been one of the drivers of CPI. This is why many officials are confident that the core inflation figure will not show as much of an anomaly.
Where the troubles start
The problem is that if energy prices remain high (or investors expect they will) then the increased cost for transportation and manufacturing will be passed on to consumers.
This comes in the context of OPEC+ agreeing to maintain its slow growth in production over the coming months. The price of crude jumped in response. And that could put further pressure on supply chains going into the critical Christmas shopping season.
Long-range weather forecasters are saying this winter is likely to be unusually cold in Europe. In turn, this could potentially exacerbate an already stressed energy system.
Just yesterday, EC President von der Leyen called for making Europe “energy independent”. This is a very challenging goal considering that oil makes up 32% of Europe’s primary energy grid. Additionally, Europe imports over 98% of its oil, chiefly from OPEC+ nations.
Getting the economy going
Now that Europe is in a position to “return to normal” post-pandemic, it’s becoming increasingly obvious that pre-pandemic Europe wasn’t doing so well.
European economic growth could simply stagnate in the coming months, as the bloc imposes more taxes and regulatory burdens in pursuit of its climate objectives. Political uncertainty in the largest economy also might keep investment on the back burner.
Analysts expect the eurozone’s retail sales to have increased 0.8% in August, compared to -2.3% in July. On an annual basis that would put the figure at just 0.4% higher than last year’s – when there were significant restrictions still in place due to covid.
