Weekly buzz: The Eurozone continues its siesta

30 June 2023

📉 Economic data paints a sleepy picture

Last week, S&P Global’s latest Purchasing Managers’ Index (PMI) showed a downturn in economic activity for the Eurozone. This round of data adds towards the picture of a continuing slowdown in the region – a long siesta of sorts.

A slowdown in activity

The Eurozone PMI surveys roughly 5,000 companies, making it a good barometer of current business conditions. The latest reading showed that manufacturing activity in the bloc continued to shrink, with the gauge falling further to 43.6 in June from 44.8 in May. For reference, a reading below 50 means more businesses see worsening conditions than improving ones, and vice versa for a reading above 50. Services activity, which makes up almost three-quarters of the European economy, slowed considerably, with the reading dropping to 52.4 from 55.1. The composite index – which combines both sectors –  fell to 50.3 from 52.8, a 5-month low.

What’s going on here?

Europe’s slowdown is proof that the bloc’s highest interest rates in 20 years are doing what they’re supposed to – cooling economic activity and bringing down inflation. The European Central Bank has emphasised its intent to defeat high inflation, but with core inflation still stubbornly high at 5.3% as of May, it’s proving to be a lengthy battle. New figures on inflation in Europe, due this week, will likely confirm that narrative.

A similar tale across the Channel

Speaking of interest rates, the Bank of England announced a bigger-than-expected interest rate hike last Thursday: a jump from 4.5% to 5% – double what economists had expected. This comes as core inflation in the UK has shot up to 7.1%, the highest level in 30 years. With economists saying a 6% interest rate would trigger a recession, the country looks caught between an economic rock and an inflationary hard place.

While high inflation and rapidly rising interest rates have put a damper on economic growth, it’s important to keep in mind that it’s natural for the economy to go through ups and downs. Staying invested for the long term helps to ride out downturns. Our General Investing portfolios, powered by StashAway or BlackRock®, are globally diversified in their exposures, and designed for long term investment.

This article was written in collaboration with Finimize.

🎓 Jargon Buster: Core inflation

We’ve all felt the pinch of inflation, and with our increasingly complex lifestyles, it can be difficult to keep up with prices. For economists however, there is a need to cut through noisy data to better understand long-term trends.

This is where ‘core inflation’ comes in. It’s based on the consumer price index, which tracks most of the things we use in our daily lives, from food to clothing, medicine to recreation – the list goes on. Core inflation however, specifically takes out food and energy (like petrol) prices, which tend to be more volatile. Think of it as a more stable measure of inflation.

🗨️ Questions and Answers

In a recent letter from our CIO, Stephanie Leung, she shared what we’ve been working on within the investment team. Since then, we’ve received questions about which economic regime we’re currently in.

In total, our ERAA® framework identifies four economic regimes, based on distinct relationships between growth and inflation. We’ve illustrated these regimes in the diagram below. Based on current macroeconomic conditions: we’re in a stagflationary environment.

Stagflation is characterised by a challenging combination of high inflation and weak economic growth. For those in charge of steering the economy, navigating this environment is tough. Central banks, for example, have been trying to bring down inflation without crushing growth – a dynamic we’re seeing in the UK and Eurozone. This tug of war between growth and inflation has historically made this environment a difficult one for investors – which is why we said in May that staying on the defence could be the best offence.

We’re always glad to answer your questions, so feel free to reach out to our team via the StashAway app.

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