International analysts see dark clouds in the market Europe’s near future. HE Nomura studio service We predict that the Eurozone and the UK will enter recession this year. “The latest survey shows particularly weak data; probability of recession which has increased. In addition, there are delays in monetary policy, increasing bankruptcies, reduced demand for loans and the worsening global situation,” Nomura experts explain. The question is whether the ECB will implement a quick turn in monetary policy to support growth. Nomura analysts said: “ Neither the European Central Bank nor the Bank of England are likely to change their monetary policy effectively, assuming the anticipated recession will be moderate. However, our view is that a rate cut from Q4 2023 to Q3 2024 would be appropriate.” Nomura is a global financial services and financial services company headquartered in Tokyo, with headquarters in Hong Kong, London and New York. It is an investment bank employing 26,000 people worldwide.
Nomura’s analysis concludes: in the eurozone, at the national level, Italy It will suffer a more substantial decline in GDP, “a deeper and longer recession“, followed by Germany, France and Spain. In the report, it is said, “We foresee a decrease of 1.6 points, 1.3 points, 0.7 points and 0.5 points in GDP, respectively.” In the case of Italy, the recession will last for four quarters (after it started in the second quarter of this year). “We expect recessions for Germany, France and Spain to start in the third quarter of 2023 and last for three quarters,” he concludes.
six elements
Six elements in Nomura’s analysis support the arguments that have warned the ECB that a cut in interest rates is appropriate. First, the impact of the changes credit terms and loans have been devastating. Household and corporate loan demand fell in the euro zone “in direct response to the ECB’s aggressive policy”. Bank loan conditions have also tightened in the Eurozone and rejection of loan requests has increased. The same is happening in England.
The second factor contributing to pessimism is business bankruptcies. Commercial bankruptcies are on the rise in both the Eurozone and the UK. According to Nomura’s calculations, the number of bankruptcies increased by 9.0% in the second quarter of 2023 compared to the previous quarter, from 3.5% in the first quarter of 2023. Liquidations are at levels not seen since the last global financial crisis.
The third key element for the analysis of macroeconomic projections is The evolution of wages in Europe. Real wages showed a weaker-than-expected increase of 4.3% year-on-year, showing a downward trend in the coming months, according to Nomura data. The fact that wages did not increase at the expected rate can be interpreted as an early indicator of a decrease in household consumption capacity. There is also concern that inflation in the UK will remain higher than in the Eurozone.
The fourth element is the largest weakness of the labor market. The unemployment rate in the UK rose to 4.2 percent from 3.5 percent in mid-2022. The Sahm Rule, a metric used in the US to signal an impending recession, is flashing red for the UK. Sahm’s rule marks the beginning of a recession if the unemployment rate has increased by 0.5 percentage points or more from last year’s minimum rate in the last three months. The idea is that it marks a doomsday threshold for employment and heralds a recession. It doesn’t happen in all eurozone countries, but it does in the UK.
If the fifth element is global context. With Nomura experts pointing to a recession in the US in the fourth quarter of this year, the general situation worries Europe as well. The smearing effect is as expected. Worse still, the latest data on the Chinese economy are also negative. Despite this, the ECB calculated that a 1% adjustment in China’s GDP growth would only affect European growth between 0.1% and 0.15%.
The sixth element is what Nomura describes. Real GDP or directly linked to domestic demand. “Despite positive real GDP growth in recent years, final domestic demand by the private sector weakened in the Eurozone as a result of the 2022 gas crisis, and there was a collapse of imports relative to exports”.
Because of all these factors; Nomura experts are pessimistic. They also ensure that the available data makes it difficult to analyze the real situation. The problem is that statistics rely on long-standing low inflation and low rates, and the current paradigm shift may overshadow the macroeconomic reading with less reliable and conflicting data across EU countries.