EU Economy: Weekly Commentary – 17 June, 2024
European Market Review
European bond yields fell post-rate cut; stocks declined despite ECB action. Euro weakened to 1.0702; Brent crude rose 4.03% on summer demand forecasts.

After the rate cut, European bond yields declined, indicating a rise in bond prices. The credit spread between German and French bonds continued widening, reaching its highest level since 2017. However, stock markets exhibited negative trends despite the ECB's rate adjustments. The euro depreciated to 1.0702 against the dollar. Additionally, Brent crude oil prices increased by 4.03%, bolstered by projections of increased summer demand that are anticipated to decrease inventories.
Europe View Synopsis
German inflation rose due to higher service prices. Eurozone industrial production faced challenges, while the UK economy showed promising growth despite the job market cooling.

Germany's CPI rose 2.4% YoY, driven by increased service prices, while HICP saw a 2.8% annual and 0.2% monthly increase. Energy prices fell by 1.1%, but food prices rose 0.6%. Core inflation, excluding energy and food, was at 3.0%. Despite challenges, such as tariff uncertainties and global demand, Eurozone industrial production decreased by 0.1% in April, with a 3% annual decline, however, started to appear signs of stabilization in new orders and consumer purchasing power. In the UK, despite flat April GDP, economic growth prospects are positive with a projected 0.4-0.5% growth in Q2, bolstered by a strong service sector and rising real wages amidst cooling job market conditions.
German Inflation
Germany's CPI rose by 2.4% YoY, driven by higher service prices. HICP increased by 2.8% annually and 0.2% monthly. Energy prices fell by 1.1%, while food prices rose by 0.6%. Core inflation, excluding energy and food, was 3.0%.

In May 2024, the Consumer Price Index (CPI) in Germany rose by 2.4% compared to May 2023, driven primarily by increased service prices. The harmonized index of consumer prices (HICP) also saw a year-on-year rise of 2.8% and a monthly rise of 0.2%. Energy prices dropped by 1.1% from the previous year, despite higher carbon prices and the end of certain VAT reductions, with notable decreases in household energy and specific fuel costs, although district heating prices rose significantly. Food prices increased by 0.6% annually, with dairy and vegetable prices falling, but substantial hikes in fats, oils, and confectionery. Excluding energy and food, core inflation was 3.0%. Goods prices grew modestly by 1.0%, with significant rises in tobacco and non-alcoholic beverages, but decreases in electronics. Service prices saw a notable 3.9% increase, influenced by higher costs for transportation, insurance, and hospitality services, despite the end of the Germany ticket's dampening effect on inflation.

Germany may face economic challenges if inflation continues to rise. Nonetheless, we anticipate that inflation is generally aligning with the trend to the target, albeit with some volatility.
Industrial Production
Eurozone industrial production fell by 0.1% in April, with a 3% annual decline. Tariff uncertainties and global demand pose risks, but gradual recovery signs emerge as new orders stabilize and consumer purchasing power improves.

Eurozone industrial production decreased by 0.1% in April, marking a 3% decline compared to the previous year. Despite some economic improvements since early 2023, the industrial sector continues to face challenges, particularly in Ireland, Germany, and Italy. Excluding unreliable data from Ireland, industrial production in the Eurozone, including Germany, showed modest growth at the start of Q2. The European Commission's new tariffs on Chinese electric vehicles, effective from July, could initially benefit European carmakers but also pose the risk of triggering a retaliatory trade war, potentially dampening investment. Coupled with energy instability and a potential decline in global demand, these factors compound the challenges confronting the Eurozone industry. Nevertheless, there are indications of gradual improvement, with new orders stabilizing and production not declining as sharply as it did at the end of 2023. Recent months have witnessed some stabilization in production figures, and with improved consumer purchasing power and potential positive effects from lower interest rates, there is a possibility of recovery despite the turbulent environment.

We expect the EU industrial sector to improve in the second half of the year, driven by rate cuts and new protectionist measures for EU carmakers, particularly in the electric vehicle sector.
United Kingdom Economy
Despite April's flat GDP, the UK's economic growth is promising, with Q2 GDP anticipated to grow by 0.4-0.5%. The service sector remains strong, real wages are rising, and inflation is near target levels. The jobs market shows signs of cooling.

Despite unremarkable April data (0%), the UK's economic growth outlook remains promising. Although industry-level trends are challenging, the economy has gained momentum this year, with an anticipated GDP growth of 0.4-0.5% in the second quarter. April's flat GDP followed a strong March and a robust first quarter, defying expectations of a decline. While production and construction struggled, potentially due to weather, the service sector, comprising 80% of economic activity, showed strength. Real wage growth and inflation near target levels contribute to rising real incomes, though consumer-facing services presented mixed results. Overall, UK growth is upward, with positive quarterly projections.

The jobs market is cooling, indicated by the rise in the unemployment rate from 3.8% to 4.4% and the return of the vacancy-to-unemployment ratio to pre-COVID levels. Despite data quality concerns, such as the pronounced fall in the Labour Force Survey response rate and potential biases, the trend is clear. Wage growth remains sticky but has shown recent deceleration, potentially due to the one-off cost of living payments not being repeated. Financial markets are underpricing the likelihood of a summer rate cut by the Bank of England, with only a 7% probability for next week and 46% for August. However, assuming services inflation data due next week is higher than expected, we expect the Bank to cut rates in September.

We anticipate a rate cut in September. While the economy is likely to show greater improvement in the latter half of the year, continued weakness in the labour market, which we hope will be avoided, could impact this recovery.
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