The High Probability of Recession in Europe Likely Will Burden Equities
Higher interest rates, rising energy prices, and plummeting credit are likely pushing the European economy into recession. We think the European Central Bank has delivered a final blow by continuing to tighten monetary policy, reinforcing our caution toward Europe and develop market equities outside the US. Let's take a closer look.
First and foremost, we believe the European Central Bank has hiked rates too much, severely damaging the availability of credit. Its full impact on the economy is likely still to be felt. But credit has already plummeted across all categories. And corporate loans are at outright decline.
A survey among banks shows corporate credit demand hitting new lows, as credit standards tighten. Further, we expect a global rise of real yields and energy prices to hurt investment and consumption. And with trade already on the back foot due to China's economic struggles, Europe's economy doesn't have much to fall back on.
The latest business and consumer sentiment data reinforced a picture of a looming recession. The for Europe's manufacturing and services sector has dropped below 50, indicating contraction. And consumer confidence has fallen. As a result, retail sales, industrial production, and trade are all declining. The only silver lining is that inflation has fallen more rapidly than expected.
We think this growing list of economic troubles makes a probability of recession across Europe high. In our view, the European Central Bank, by looking backward more than forward, will likely keep monetary policy tight for too long. And policy makers can't control rising real yields, higher energy prices, and weak trade at the same time. Therefore, we've maintained our cautious stance towards with a tactical underweight to develop markets outside the US in our global policy model that guides allocation in Northern Trust portfolios.
The Purchasing Managers Index, a series of monthly reports by the Institute for Supply Management, is a survey of purchasing and supply executives on business activity for services and manufacturing. The reports provide insight on the direction of the economy.
Likelihood of Recession Merits Caution on European Equities
We think the European Central Bank, by looking backward more than forward, will keep interest rates too high for too long, contributing to the path toward likely recession. In our global policy model that guides allocation in Northern Trust portfolios., we've maintained our cautious stance towards European equities with a tactical underweight to develop markets outside the U.S.
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Wouter Sturkenboom
Chief Investment Strategist – EMEA and APAC
Wouter Sturkenboom, CFA, CAIA, is chief investment strategist for EMEA and APAC at Northern Trust. He is also a member of the Interest Rate Strategy Committee and Investment Policy Committee.
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