Eurozone Data Takes Centre Stage, but the Market Is on the Lookout for Banking Headlines

Central Bank

Economic

Summary:

With the market remaining on its toes regarding the ongoing banking sector issues, next week brings significant data in the euroland in the form of business surveys and inflation data. The ECB is clearly interested in these economic releases, particularly following last meeting’s change of strategy. However, there is a lingering fear about further negative banking news that could possibly derail the ECB’s tightening effort and put a stop to the euro’s rally.

Central banks would like some quiet time

The universe appears to have moved a few months forward in just three weeks, from the ballooning rate hike projections and the talk about a 6% Fed funds rate in the US to the current subdued rate expectations. Central bankers must have had their world turning upside down over the past weeks, but up to now they have behaved calmly and found some short-term solutions. Whether these would work in the long-term is another story, but central bankers have to remain focused on the economic situation as inflation remains a global issue, while meeting their financial stability responsibilities. A bit of quiet time is a very precious commodity from their standpoint at this juncture.

Following on the path laid down by Lagarde et al last week, Fed chairman Powell announced a rate hike and a possible early end to the current tightening cycle. This abrupt change in the central banks’ strategy is the result of the recent banking sector woes. The collapse of three small US banking institutions and the Credit Suisse saga are expected to significantly impact the overall bank lending and borrowing appetite, potentially rendering further rate hikes unnecessary. The interesting fact from the ECB’s perspective remains that there have not been any euro area bank casualties. If the situation progresses according to the wishes of both the ECB and bank regulators, the market will have a chance next week to refocus on economic releases. At the end of the day, Lagarde laid out the revamped “data dependent” strategy and thus raised the importance of next week’s data.

Eurozone Data Takes Centre Stage, but the Market Is on the Lookout for Banking Headlines_1

CPI is the main dish on next week’s menu

Inflation prints produced the strongest post-announcement volatility during 2022. This appears to have abated somewhat lately, but it is expected to escalate again going forward. On Thursday, we will get a barrage of February CPI prints for the key German states and the preliminary German number, if there are no unforeseen issues like last month. On the following day, the preliminary euro area figure will be released, and the market will be focused on both the trend and the outright level of the inflation figures. The headline number has been on a gentle downward trend, pleasing the ECB, but the same cannot be said for the core component. It has been making higher highs, and a similar print on Friday could result in a plethora of comments from the ECB hawks about the appropriate response at the next rate-setting meeting, especially if it prints above 6% on Friday. On Wednesday morning, the GfK Consumer confidence survey may give us some early hints about the current consumer appetite.

IFO survey on Monday

Next week, though, will start on an equally high note as the German IFO survey will be published on Monday morning. The March edition of the most closely watched leading indicator for the German GDP is unlikely to escape from the March performance of both the ZEW survey and PMIs. It is worth noting that part of the IFO survey responses might have come before the Credit Suisse saga and hence Monday’s results might not be entirely representative of the troubling sentiment on the ground. Having said that, the IFO expectations component is already pointing to a weak first quarter GDP, and another print on Monday towards the 75 area would probably cement these bearish expectations.

Eurozone Data Takes Centre Stage, but the Market Is on the Lookout for Banking Headlines_2

Swissie remains under pressure against the euro

Considering the recent economic developments, the market has managed to not get carried away. Stock indices have somewhat recovered from the early March low and euro/dollar remains elevated but far from the early February high of 1.1032. Gold and Bitcoin have clearly been the main beneficiaries of the recent market rout as they continue to keep their gains. This could potentially reveal increased hesitation from investors at this stage.

The euro/swissie pair has understandably received increasing attention recently. Since October 13, 2022, this pair has actually been trading inside the 0.9706-1.0041 range. More recently, the Credit Suisse woes allowed the swissie bears to stage a quick recovery towards the busy 0.9960 level. The area extending up to 1.0096 has been a landmine for euro bulls and, at the moment, the overall technical picture is not overly supportive of their intentions. Particularly, the developing bearish divergence between the stochastic oscillator and euro/swissie could derail their plans to aim for a new 2023 high. On the other hand, the appetite by the swissie bulls will be tested at the 50- and 100-day simple moving averages.

Source:XM

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Owen Li

Economic

Pinky Negi, an Indian teacher with two master's degrees, loved her old job at a public school in the Himalayan foothills. But then she did what millions of Indian women do every year - gave up her career when she got married and had children.

"The idea of not earning pinches me the most when I have to ask for the smallest of things," said Negi, who briefly tried home tutoring before the birth of her second child led her to give up work altogether.

"Even if I have to ask my husband, it is still asking someone else," she told the Thomson Reuters Foundation in New Delhi at an office of the Self-Employed Women's Association (SEWA), a union group that helps women find work.

Negi's experience is common in India, where women have been dropping out of the workforce even at a time of strong growth in Asia's third-biggest economy.

The country is set to become the world's most populous as the United Nations forecasts its population to touch 1.43 billion on April 14, overtaking China on that day.

Economists say that means India, which is home to the highest number of working-age people, must not only create more jobs to keep its world-beating growth on track, but also foster employment conditions favourable to women.

Less than a third of Indian women are working or actively seeking work, data shows, despite progress such as better educational attainment, improved health, falling fertility rates and more women-friendly labour policies.

There are numerous reasons for the shortfall, researchers say, from marriage, child care and domestic work to skills and education gaps, higher household incomes, safety concerns and a lack of jobs.

Policy changes that could rectify these problems - such as improved access to education, child care or flexible work setups - could boost the number of working women and add hundreds of billions of dollars to India's gross domestic product (GDP) by 2025, a 2018 report by the McKinsey consulting firm found.

"The absence of women from the labour market reduces productivity and leads to income inequality," said Mayurakshi Dutta, a researcher at Oxfam India, which attributed the low labour force participation of women to gender discrimination in terms of wages and opportunities in a 2022 report.

Women's work under-reported?

According to the World Bank's latest data, women represented 23% of India's formal and informal workforce in 2021, down from nearly 27% in 2005. That compared with about 32% in neighbouring Bangladesh and 34.5% in Sri Lanka.

India's labour and women's ministries did not respond to requests for comment.

Federal government data shows the female labour force participation rate (FLFPR) rose to 25.1% in 2020/21 from 18.6% in 2018/19.

The economic survey from earlier this year said current measuring tools were inadequate for accurately gauging the FLFPR, tending to under-report the proportion of working women.

For example, it found that data did not reflect women's unpaid work such as running a household, farming or income-saving activities such as collecting firewood, cooking and tutoring children.

"Women have to take care of homes and we find it difficult to find full-time jobs. If I had support (at home), I would have liked to work too," said 35-year-old Beena Tomar, who does part-time home-based needlework.

Investing in the care economy can reduce the unpaid care burden, and also create jobs in the care sectors that are major areas for women's employment, gender specialist Aya Matsuura and Peter Buwembo, a labour statistician, at the International Labour Organization (ILO) said in emailed comments.

COVID-19 Impact

Improving access to quality education, training programmes and skills development is vital to boosting employment opportunities for women and girls, said Oxfam's Dutta.

Employers should also provide gender-sensitive policies such as access to social protection, child care, parental leaves, and provision of safe and accessible transport, she added.

Last year, Prime Minister Narendra Modi asked states to use systems such as flexible working hours to retain women in the labour force, saying the country could achieve its economic goals faster if it made use of "women power".

Researchers point to public programmes like the government's skills development scheme, which trained more than 300,000 women in 2021/22, as promising initiatives.

But they say more needs to be done, especially for women still feeling the economic impacts of the COVID-19 pandemic.

Most Indian women are in low-skilled work such as farm and factory labour and domestic help, sectors hard-hit by COVID.

While the economy has rebounded since then, it has failed to restore jobs for women, who were more likely to have lost their jobs than men and less likely to return to the workforce, a report by the Centre for Sustainable Employment at Azim Premji University found.

Bhawna Yadav is one of them. The 23-year-old was a make-up saleswoman at a Delhi mall before the first lockdown in March 2020, when she had to move in with her in-laws in northern Haryana state after she and her husband lost their jobs.

While he moved back to Delhi after restrictions lifted, she stayed behind.

"I had no job to go back to despite many calls to different companies ... Plus, my husband and in-laws were against it because I was pregnant," the mother-of-two said by phone from Baroli village.

She said her in-laws dismissed her career ambitions, telling her "being a mother is a job" or "your husband is earning", and suggesting instead that she work as a farmhand.

"It infuriates me. I'm qualified to do more ... They don't realise how much I miss my old life - the freedom, my friends, colleagues, and having my own money," she said.

Aspirations Ignored

Sona Mitra, principal economist at Delhi-based IWWAGE, which works to boost the FLFPR, said women's particular career ambitions are too often dismissed in a labour market that has failed to create the jobs women want.

"They don't want to work in agriculture nor do they want to work as domestic workers. They want some other types of jobs which are going to respect them, give them dignity and recognise them for their abilities and their educational degrees ... Where are those jobs?," said Mitra.

She said this often led to underemployment and poor earning capacity among women.

Negi, the school teacher, who is in her 30s and has a master's in Hindi and English, said she had repeatedly been offered low-skilled, low-paid roles when she had tentatively tried to return to work.

That left her feeling demoralised, leading to an 11-year career break that has started to strain household finances.

Today, she is looking for teaching jobs with flexible hours in schools close to her home.

"A woman has to handle everything - home and outside. There are no exceptions for us," said Negi.

"But I feel my routine will get better if I get back to work ... the more you go out, the more people you meet, the fresher your mind gets."

Source: Bdnews24

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Kevin Du

Rapid technological advances such as the ChatGPT generative artificial intelligence (AI) app are complicating efforts by European Union lawmakers to agree on landmark AI laws, sources with direct knowledge of the matter have told Reuters.

The European Commission proposed the draft rules nearly two years ago in a bid to protect citizens from the dangers of the emerging technology, which has experienced a boom in investment and consumer popularity in recent months.

The draft needs to be thrashed out between EU countries and EU lawmakers, called a trilogue, before the rules can become law.

Several lawmakers had expected to reach a consensus on the 108-page bill last month in a meeting in Strasbourg, France and proceed to a trilogue in the next few months.

But a 5-hour meeting on Feb 13 resulted in no resolution and lawmakers are at loggerheads over various facets of the Act, according to three sources familiar with the discussions.

While the industry expects an agreement by the end of the year, there are concerns that the complexity and the lack of progress could delay the legislation to next year, and European elections could see MEPs with an entirely different set of priorities take office.

"The pace at which new systems are being released makes regulation a real challenge," said Daniel Leufer, a senior policy analyst at rights group Access Now. "It's a fast-moving target, but there are measures that remain relevant despite the speed of development: transparency, quality control, and measures to assert their fundamental rights."

Brisk Developments

Lawmakers are working through the more than 3,000 tabled amendments, covering everything from the creation of a new AI office to the scope of the Act's rules.

"Negotiations are quite complex because there are many different committees involved," said Brando Benifei, an Italian MEP and one of the two lawmakers leading negotiations on the bloc's much-anticipated AI Act. "The discussions can be quite long. You have to talk to some 20 MEPs every time."

Legislators have sought to strike a balance between encouraging innovation while protecting citizens' fundamental rights.

This led to different AI tools being classified according to their perceived risk level: from minimal through to limited, high, and unacceptable. High-risk tools won't be banned, but will require companies to be highly transparent in their operations.

But these debates have left little room for addressing aggressively expanding generative AI technologies like ChatGPT and Stable Diffusion that have swept across the globe, courting both user fascination and controversy.

By February, ChatGPT, made by Microsoft-backed OpenAI, set a record for the fastest growing user base of any consumer application app in history.

Almost all of the big tech players have stakes in the sector, including Microsoft, Alphabet and Meta.

Big Tech, Big Problems

The EU discussions have raised concerns for companies -- from small startups to Big Tech -- on how regulations might affect their business and whether they would be at a competitive disadvantage against rivals from other continents.

Behind the scenes, Big Tech companies, who have invested billions of dollars in the new technology, have lobbied hard to keep their innovations outside the ambit of the high-risk clarification that would mean more compliance, more costs and more accountability around their products, sources said.

A recent survey by industry body appliedAI showed that 51% of the respondents expect a slowdown of AI development activities as a result of the AI Act.

To address tools like ChatGPT, which have seemingly endless applications, lawmakers introduced yet another category, "General Purpose AI Systems" (GPAIS), to describe tools that can be adapted to perform a number of functions. It remains unclear if all GPAIS will be deemed high-risk.

Representatives from tech companies have pushed back against such moves, insisting their own in-house guidelines are robust enough to ensure the technology is deployed safely, and even suggesting the Act should have an opt-in clause, under which firms can decide for themselves whether the regulations apply.

Double-edged sword?

Google-owned AI firm DeepMind, which is currently testing its own AI chatbot Sparrow, told Reuters the regulation of multi-purpose systems was complex.

"We believe the creation of a governance framework around GPAIS needs to be an inclusive process, which means all affected communities and civil society should be involved," said Alexandra Belias, the firm's head of international public policy.

She added: "The question here is: how do we make sure the risk-management framework we create today will still be adequate tomorrow?"

Daniel Ek, chief executive of audio streaming platform Spotify – which recently launched its own "AI DJ", capable of curating personalised playlists – told Reuters the technology was "a double-edged sword".

"There's lots of things that we have to take into account," he said. "Our team is working very actively with regulators, trying to make sure that this technology benefits as many as possible and is as safe as possible."

MEPs say the Act will be subject to regular reviews, allowing for updates as and when new issues with AI emerge.

But, with European elections on the horizon in 2024, they are under pressure to deliver something substantial the first time around.

"Discussions must not be rushed, and compromises must not be made just so the file can be closed before the end of the year," said Leufer. "People's rights are at stake."

Source: Reuters

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Thomas

Energy

Russian President Vladimir Putin and Chinese leader Xi Jinping met in Moscow for two days of talks which ended Tuesday, during which they discussed a major new infrastructure project, Power-of-Siberia 2, to deliver gas to China via Mongolia.

Putin said Russia, China and Mongolia had completed "all agreements" on finishing the pipeline to ship Russian gas to China, and that Russia will deliver at least 98 billion cubic meters (bcm) of gas to China by 2030, although a subsequent Russian statement said pipeline details still need to be resolved.

Russia proposed the route years ago but the plan has gained urgency as Moscow looks to Beijing to replace Europe as its major gas customer.

However, China is not expected to need additional gas supply until after 2030, experts say.

What is the Power-of-Siberia 2 pipeline?

The proposed pipeline would bring gas from the huge Yamal peninsula reserves in west Siberia to China, the world's top energy consumer and a growing gas consumer.

The first Power-of-Siberia pipeline runs for 3,000 km (1,865 miles) through Siberia and into China's northeastern Heilongjiang province.

The new route would cut through eastern Mongolia and into northern China, according to a map by Russia's Gazprom.

Gazprom began a feasibility study on the project in 2020, and has aimed to start delivering gas by 2030.

The 2,600-km pipeline could carry 50 billion cubic metres (bcm) of gas a year, slightly less than the now defunct Nord Stream 1 pipeline linking Russia to Germany under the Baltic Sea.

What did xi and Putin say about the pipeline?

Before Xi's visit, Putin referred to the Power-of-Siberia pipeline as "the deal of the century."

But a joint statement after their talks said only that the parties involved "will make efforts to advance work on the study and approval" of the pipeline. However, official accounts of Xi's statements issued after the meetings do not mention the pipeline.

"We don't really think it's finalised yet, there are still lots of finer details to be hammered out," said Wang Yuanda, China gas analyst at data intelligence firm ICIS.

"Russia is probably more desperate to sell gas than China needs at the moment."

What does Mongolia say?

When Putin and Xi met in September with Mongolian President Ukhnaagiin Khurelsukh, Khurelsukh said he supports the construction of oil and gas pipelines from Russia to China via Mongolia, adding that its technical and economic justification should be studied.

Mongolian Prime Minister Oyun-Erdene Luvsannamsrai told the Financial Times in July that he expected Russia to begin construction on the pipeline within two years, but added that the final route through Mongolia was not yet decided, according to the newspaper.

Does China need more Russian gas?

Gazprom already supplies gas to China through the first Power-of-Siberia pipeline under a 30-year, $400 billion deal, which was launched at end-2019.

Expected to supply 22 bcm of gas in 2023, it will deliver increasing volumes before reaching full capacity of 38 bcm by 2027.

In February 2022, Beijing also agreed to buy gas from Russia's Far East Island of Sakhalin, which will be transported via a new pipeline across the Japan Sea to China's Heilongjiang province, reaching up to 10 bcm a year around 2026.

Meanwhile, China is negotiating a new pipeline - Central Asia–China Gas Pipeline D - to source 25 bcm of gas annually for 30 years from Turkmenistan via Tajikistan and Kyrgyzstan.

Additionally, China has long-term contracts with Qatar, the United States and global oil majors for LNG supplies. It imported 63.4 million tonnes of the chilled fuel last year.

"The original target is for China to import 38 bcm of Russia gas by 2025. Now Russia is saying this will reach 98 bcm by 2030. That is a very big jump, so it pays to be slightly cautious on that," said Wang, the analyst.

China will also be wary of finding itself in a similar position to Europe if it becomes more reliant on Russia, he added.

Source: Deccan Herald

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Cohen

Energy

The Indian subcontinent, Southeast Asia and Sub-Saharan Africa will overtake China, North America and Europe as the key drivers of world energy use through 2050, with implications for global emissions potential and accountability.

China, the United States and Europe have been the main sources of economic growth and pollution for the past century, accounting for over half of all historic carbon dioxide (CO2) emissions and energy use, but also the majority of spending on renewable energy and emissions abatement.

In contrast, the emerging markets within South Asia, Southeast Asia and Sub-Saharan Africa currently account for less than 20% of worldwide energy use and emissions, data from Norway-based risk assurance firm DNV shows, and have less funding available for energy transition efforts than larger peers.

Global Energy Use and Emissions Hubs Set to Shift by 2050_1

Even so, thanks to strong investment and demographic trends within several key countries including India, Indonesia, and Nigeria, these regions will boost their collective consumption of primary energy supplies - which includes transport fuels - by nearly 60% through 2050, according to DNV data.

Offset

This collective rise in energy use across emerging Asia and lower Africa will more than offset the expected contraction in energy consumption in China, Europe and North America through 2050, DNV data shows.

Combined primary energy use in the Indian subcontinent, Southeast Asia and Sub-Saharan Africa will grow from roughly 115,000 petajoules in 2023 to nearly 194,000 petajoules by 2050, an expansion of more than 78,000 petajoules.

Over the same period, China, Europe and North America are expected to trim their collective energy use from around 326,000 petajoules to 250,000 petajoules, or by around 76,000 petajoules.

Global Energy Use and Emissions Hubs Set to Shift by 2050_2

This means that global energy consumption will continue to grow from current levels by 2050, despite the efforts of current energy transition leaders to reduce energy use by mid-century, DNV data shows.

Fossil Fuelled

In addition to growing overall energy use, most Asian and African countries will remain overwhelmingly reliant on fossil fuels for at least the next decade, due to the slow roll out of green energy and underdeveloped electricity grids that will struggle to accommodate intermittent renewable energy supplies.

This will likely result in a widening in the number of heavy emissions hubs from mainly in China and South Asia currently to parts of Southeast Asia and lower Africa, undermining efforts to cap pollution totals in all areas.

South Asia's largest economy, India, is expected to rely on coal, natural gas and oil for more than 70% of primary energy needs through 2040, after which solar, wind and other clean energy supplies will emerge as the dominant sources of power.

Global Energy Use and Emissions Hubs Set to Shift by 2050_3

In Southeast Asia, more than 70% of primary energy is set to come from coal, natural gas and oil through 2035, while in Sub-Saharan Africa the share of fossil fuels in primary energy supplies is set to continue expanding until the mid-2040's, despite steep simultaneous advances in renewable energy supplies.

Manufacturing Momentum

Adjustments in manufacturing capacity are set to be a key driver of energy demand growth across Asia and Africa over the coming years.

Downsizing of outdated or uncompetitive capacity is set to reduce Greater China's energy demand from manufacturing by 23% between 2025 and 2050, DNV data shows.

Over the same period, Sub-Saharan Africa is set to experience a nearly 200% climb in energy demand for manufacturing as more factories and industrial plants emerge in the region in response to favourable labour market and capital investment trends.

Strong growth rates in manufacturing energy demand are also expected in the Indian subcontinent (up 93% from 2025 to 2050), Southeast Asia (up 42.5% from 2025 to 2050) as well in as the Middle East, North Africa and Latin America.

Global Energy Use and Emissions Hubs Set to Shift by 2050_4

Currently, coal, natural gas and biomass are the primary sources of power for manufacturing in Africa and Asia, where abundant and affordable energy supplies are often more important to a manufacturers' bottom line than the emissions toll linked to its fuel source.

However, given the widespread global support for rapid renewable energy deployment in all regions, it is likely that increased volumes of cheap green energy may displace some fossil fuels in certain markets over time.

If so, the global energy landscape of 2050 will not just have drastically different geographic concentrations of energy use, but also a cleaner emissions profile that may support energy transition efforts.

Source: Reuters

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Ukadike Micheal

Central Bank

Economic

Pressures on the European Central Bank to raise interest rates are likely to increase unless European governments agree fiscal targets that are ‘more binding, less discretionary and more stringent’. At the same time the ECB will be keeping a close watch on both corporate profits and wage claims to try to achieve ‘sensible’ outcomes.

These were central messages from Joachim Nagel, president of Deutsche Bundesbank, at lectures in London and Edinburgh co-organised by OMFIF with King’s College London and the University of Edinburgh.

Nagel stated his understanding for employees in Germany and around the euro area pursuing higher wage claims to offset steep falls in real incomes. But tight labour markets were impeding central banks’ efforts to relieve wage pressure, he said, indicating the ECB would not hesitate from contributing to higher unemployment if this was necessary to bring price rises down to the ECB’s 2% annual target.

Nagel, in formal speeches on 22 and 24 March and a series of associated gatherings, reinforced his focus on preventing near double-digit inflation from becoming embedded in the euro area. He made clear the ECB needed to tighten policy further despite high debt levels and problems at individual banks suffering from the effect of higher interest rates on their asset valuations.

Looking ahead, he said that rates needed to stay at ‘restrictive levels’ for a prolonged period, scotching market hopes that central banks would soon retreat from policy tightening. On the ‘terminal rate’, he said he was ‘not a great supporter’ of model-based calculations of the level likely to end the present rate-tightening cycle, as these were often based on demand-orientated equations that failed to spot the outcome of supply-side shocks. ‘I have my own idea of where the terminal rate is – but I am not going to tell you.’

He adhered to the line that turmoil at some exposed banks – including Credit Suisse – reflected ‘idiosyncratic’ and not systemic difficulties. At the session in Edinburgh, he declined to comment on the steep 24 March Deutsche Bank share price fall. ‘When inflation is stubborn, we have to be even more stubborn.’

Nagel said he welcomed further action to reduce the ECB balance sheet beyond the relatively modest action so far this year. He wishes the ECB to stop repurchasing all bonds maturing under its ‘asset purchase programme’ from July. This would upgrade the present agreement to carry on reinvesting half of the monthly €30bn total of bonds falling due.

He hinted at proposals to stop reinvesting outstanding stocks of bonds purchased under the Covid-19 emergency programme from the end of the year.

Separately the ECB is considering measures to curb losses for central banks and lower profits for commercial banks resulting from sharply higher deposit rates on bank reserves. Raising reserve requirements and lowering interest rates on the liabilities side of European central banks’ balance sheets are believed to be measures under consideration.

Nagel said monetary policy-makers needed to ‘act decisively’ – evidenced by the ECB’s six rate hikes since July as well as the start of quantitative tightening measures to start reducing its excessively high balance sheet. But they also need governments to first decide and then implement euro area fiscal rules. ‘Fiscal policy needs to work with us in the same direction. [Governments] should not use fiscal space for more programmes. Otherwise we will have to do more on the monetary policy side.’

Accommodative monetary and fiscal policy in the past three years has supported economic growth during the period of Covid-19 and Russian-Ukrainian war upsets, helping to avoid the recession many had predicted. The rise in inflation is becoming more broad based, with euro area consumer price index inflation in 2023 likely to be 5.3% (6% in Germany), more than twice the ECB’s 2% target.

Bundesbank Calls for Steps on Fiscal Rules, Wages and Profits to Beat Inflation_1

Affirming that, ‘We will do what is necessary to return inflation to target,’ Nagel said higher interest rates would cause banks and other market participants to take fewer risks. He indicated that one reason behind the failure of Silicon Valley Bank was a careless attitude towards risk-taking.

Nagel said banking turbulence did not amount to a financial crisis comparable to 2008. ‘We have to do what we can to maintain market stability… We have the right instruments to do this,’ he stated, reinforcing ECB President Christine Lagarde’s reassurance on 18 March. ‘We are coming out of an exceptional decade where money was cheap.’ The outcome of the last financial crisis in 2008 was better regulation and stronger bank capitalisation. ‘There is a lot more we can do from our toolboxes.’

Source:David Marsh

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Justin

Economic

The jump in PMI was mainly driven by the service sector

It’s hard to get a good sense of where the eurozone economy is headed these days. Underlying developments in the fourth quarter were particularly weak, but surveys have recently suggested that the first quarter of this year is already showing some improvements. Today’s PMI perfectly fits that view as the jump from 52 to 54.1 suggests a fairly strong rebound in activity. Then again, hard data on industrial production and retail sales have not given a particularly strong view one way or another. Still, the first quarter is starting to look better than initially expected.

The positive impact was mainly driven by the service sector as the services PMI improved from 52.7 to 55.6. Growth was rather broad-based between business-to-business and consumer services, according to the survey. New orders are causing backlogs of work to increase in services, but in manufacturing we see the exact opposite. Manufacturing output PMI decreased from 50.1 to 49.9 and new orders continue to weaken. A key positive factor for manufacturing is that supply chain problems continue to fall sharply, which is helping production eat into backlogs at the moment.

The impact of the recent banking turmoil on the eurozone economy is not yet clear to see, but if problems remain contained we still expect a mild downward effect on economic activity for the coming quarters. That adds to a picture of weak economic growth for the quarters ahead as high inflation and monetary tightening weigh on economic prospects.

Overall, the inflation picture continues to improve. Price pressures are down for both manufacturing and services, but still at elevated levels. The latter is especially true for services, and the strong service sector performance adds to concerns about elevated services inflation for the months ahead. While forward-looking signs for energy, food and goods inflation are becoming more benign, this is not yet the case for services. For the ECB, this will be a key argument to continue hiking – albeit at a slower pace – at the coming two meetings. If financial conditions allow, that is.