The drums of a slowing economy echo across Europe. Investors acknowledge that 2023 will be a challenging year, and blunt talk is acceptable. Christine Lagarde, speaking at a press conference following the ECB’s interest rate decision, notes that the cost of money remains higher and is likely to rise further in the months ahead. The ECB nudged the rate up by 0.5 percentage points, yet the institution’s leadership warned that more increases could follow. “If three additional hikes of 0.5 are implemented, rates would reach 4%. That is what markets are pricing in, and it helps explain the broad declines in European equities,” explains Joaquín Robles, an analyst at the XTB investment house.
The Spanish stock index is down more than 1.5% in today’s session. EuroStoxx 50, which aggregates Europe’s biggest shares, has shed about 3% in value. The CAC 40 in France is down 2.61%, while the DAX 30 in Germany has fallen close to 2.81%. Frankfurt is off by around 3%, and Milan is down roughly 2.9%.
The hardest hit names include revenue drivers and banks. Banco Bilbao Vizcaya Argentaria (BBVA) has declined by nearly 4%, and Banco Santander has slipped by a bit more than 2%. “Although higher interest rates can benefit banks in the short term, many analysts warn that tighter policy could weigh on loan growth and push up defaults next year, pushing banks to bolster provisions,” Robles notes. The market has not fully priced in these potential risks yet.
recession in 2023
The ECB’s Governing Council has signaled a readiness to press ahead with rate increases, using language that underscores urgency. “With the data available, it is clear that further increases of 50 basis points are likely to be warranted for an extended period,” Lagarde stated during the briefing. The eurozone is expected to enter a recession in the first quarter of 2023 as the economy shows contraction in the fourth quarter of the year and continues into the next period. The ECB’s stance aligns with additional tightening by the Federal Reserve, which on the same day raised rates by 0.5 percentage points to a range of 4.25% to 4.5%. The Bank of England, Switzerland, and Norway have also moved higher in tandem with global policy tightening.
A further consequence of higher rates is the rise in borrowing costs. Spanish government bonds maturing in 2032 climbed 20 basis points to about 3.16%, marking the largest leap since last June. Italian ten-year bonds rose by roughly 27 basis points to around 4.13%.