Top-tier macro updates out of Europe reflected varying degrees of economic resilience, even as stagflation vibes were unmistakable.
Overall, the European economy eked out the smallest of expansions in Q1, growing 0.1%, according to figures released on Friday.
It was an underwhelming performance to be sure, but we should be cognizant of the circumstances. Europe was widely expected to suffer a debilitating recession over the winter months amid what many worried would be an existential energy crunch.
I dutifully parroted some version of that dire narrative, not because I’m unoriginal and certainly not because I enjoy trafficking in gloomy forecasts, but rather because it seemed like the most probable outcome under the circumstances. Things changed, though, as energy prices abated and governments stepped in to shield households from the worst.
“The eurozone economy carries on along the rim of stagnation,” ING remarked, in a mixed assessment. “‘More resilient than expected’ is clearly one label to put on [it],” Carsten Brzeski said, noting that the downturn Europe ultimately dodged was “the best-predicted recession ever.”
I’d modify Brzeski’s summary: Europe is carrying on “along the rim of stagflation,” as is the US.
Across the region, performance varied. The Germany economy, Europe’s largest, stagnated, while both the Italian and Spanish economies outperformed. Portugal was a bright spot, and France managed a 0.2% expansion despite ongoing domestic discord tied to Emmanuel Macron’s ill-advised pension “reform” gambit. The protests did weigh on some sectors in March.
Recall that PMI data released last week suggested services activity in Europe picked up smartly in April, good news, except that it underscored the risk of sticky underlying inflation.
Speaking of inflation, it’s still a problem. Between base effects, subsidies and any number of other distortions, keeping track of what “should” or “shouldn’t” be happening with price growth at the country level is virtually impossible, but to summarize, French inflation is rising again, core inflation in Spain slipped but remains very high at 6.6% (juxtaposed with producer prices, which are now actually falling on a YoY basis in Spain) and price growth in Germany, while receding, is obviously nowhere near the ECB’s target.
Apparently, Friday’s dizzying hodgepodge of inflation figures together presage a pretty meaningful drop in bloc-wide core inflation, which in turn might ease pressure on the ECB. They won’t be easing, though. Or at least not over the next several meetings. Inflation long ago found its way into European services and wage-setting — the genie is out of the lamp, so to speak. A 25bps hike is assured next week, and there are two more in the pipeline after that, if you believe consensus.
I realize all of this is terribly dry, and somewhat painful to read, but it’s crucial to stay apprised. The problem with tuning out when there’s little in the way of macro fireworks is that when the drama starts up again (which it invariably will sooner or later), you’ll be bereft when it comes to context. That’s not a position you want to be in, or at least not if you fancy yourself a “serious” observer.
As always, sir, you are the king of context, for which we all thank you. Among other things I do to add some meaning to my being, is act as an editorial reviewer of articles and case studies submitted to journals to be considered for publication. Over my career I have read over 500 of these things, 50 last year alone (I also have lots of available time others don’t). The biggest weakness of these case studies is that the majority lack any consideration of context. Decisions and understanding must be considered in context, something today’s analysts. What context is included in many of these studies goes all the way back to 2021! Sportscasters, for example, constantly find themselves trapped by monster cases of recency bias. Too many have never heard of Ted Williams, Bill Russell (the real GOAT), Warren Spahn, George Blanda (won a scoring title in his 50s, 26 year career). As you have said, in today’s media, the laughable spouters see context as last night. From a policy standpoint this lack of context is a very scary feature of today’s lousy decision making.
“I realize all of this is terribly dry, and somewhat painful to read, but it’s crucial to stay apprised.”
I don’t know how big the minority I represent is, but I delight in the “dry” articles, and dislike when you try to cast aspersions upon them. We dry article fanciers celebrate every CTA model update, gamma-flip point, and flow breakdown analysis we can get.