Record inflation, slower growth, and higher interest rates: a dangerous cocktail

Echoing the famous statement that Draghi made during the 2012 financial crisis, where he announced that the European Central Bank would do everything in its power “to save the euro,” Christine Lagarde has taken over at a time that won't be easy for the European economy. This time the speech took place in Sintra instead of London, where she confirmed that the ECB would take any measures necessary to keep expected inflation at 2%; that is, tackling the body's main objective.

This certainly won’t be an easy task as things currently stand, at least in Spain, where inflation has shot up to 10.2%, up 1.8% from the previous month (the highest figure since 1985). Skyrocketing prices have ignited some fears over what may happen in the short and long term. None of this is good news in the eyes of Alberto Matellán, head economist at MAPFRE Inversión, though he does recognize that analysts predicted much of what is happening: “This inflation is higher than expected, but we've already been saying for weeks that it would plateau, so it's within the range that we predicted.”

As a result, he anticipates that these figures will diminish disposable income even further, make it difficult to maintain business margins, and distort economic policies. Solutions to these problems won’t be found in the short term, unfortunately, and even though Ismael García Puente, investment manager at MAPFRE Gestión Patrimonial, has explained that “the central banks have the necessary tools” to ride out the worst possible scenarios, monetary policy decisions that are approved by central banks to combat rising prices “have long-term effects.”

Thus, experts are already forecasting that the negative trends seen in the first half of the year will continue in the second half: “There are several issues at stake here: high inflation coinciding with slower growth rates and higher interest rates as well,” explained Matellán. He agrees that this may seem like a messy cocktail, but there is a slight advantage to it. “If prices stabilize, it’s possible that we’ll see the central banks start to moderate their messages.”

Is the economy in a slump?

Messages conveying efforts to control the inflation that has been triggered by the supply crisis stemming from the energy sector and rising raw material prices, are coming at a moment where markets are starting to breathe easier, at least for now, after spending several consecutive weeks in the red. Downward trends that are arriving on the market scene, together with poor macroeconomic figures could, as many have mentioned in the past few weeks, nudge us towards an eventual recession, but García Puente dismisses this notion for now: “It's true that we're scared because we're associating all of this with the crisis, but that's not what’s happening.” He does recognize, however, that growth has lessened, which is something that had already been forecasted. As he explains, all these signals may point to “a slump, but not an apocalyptic scenario.”

Forecasts for the main indexes are moving in the same direction as growth expectations, which will probably leave investors uneasy for some time to come. Acknowledging this, Matellán points out that how we feel about the market can change before economic indicators do: “We may see investors’ moods expressed in the fall before central banks release any messages.”