"For now, at least, there will be no recession in the Eurozone"

In an interview given in the context of the Davos Forum, Christine Lagarde, President of the European Central Bank (ECB), said that her organization is “for the moment” rejecting the possibility of a recession in the eurozone. She explains that there is no need to panic at a time when inflation “is fueled by the supply side”, and that in terms of its monetary policy, “we don’t have to rush”. However, normalization of the central bank’s policy has already been given a more specific date: July. This is when the ECB anticipates that it will perform its first interest rate hike. As explained by Ismael García Puente, a manager at MAPFRE Gestión Patrimonial, the general prediction is that they will wait until the end of the third quarter to raise the official rate to 0%, “which is still loose monetary policy”.

The ECB says that in view of what has occurred up until now, it has sufficient reason to believe that it is too early to talk about a crisis on the continent. In a post published this same week, the institution states that “unemployment rates are at minimum levels, families have been able to accumulate savings, and a strong summer is being forecast for the tourism industry”, and these are factors that will offset some of the negative effects of war and inflation. What the central bank has done quite successfully up until now is to control expectations: “the market has tended to believe the ECB’s assurances that it will be able to control inflation, but with the trade-off being lower growth”, Mr. García Puente explains.

However, he also believes that the speed with which the central bank has updated its future plans for its monetary policy largely reflects an attempt to halt depreciation of the euro (which has been approaching a state of parity with the dollar). “When a currency depreciates, it means that imports become more expensive, and this hurts the economy”, he says, adding that “if the ECB continues along the same lines as the Fed in terms of rate hikes, the euro will recover the ground it has lost”.

“NO” to recession, but “YES” to deceleration?

Mr. García Puente believes that although the crisis situation needs to be included in the analysis, it should not be the central theme. The current snapshot of the economy is therefore not a picture of recession, but instead deceleration. However, this has not yet become a confirmed reality throughout Europe. Instead, “it’s more of a generalized perception”: the United States and China (and also Russia, which may be on the verge of defaulting on its debt) are also being blamed for falling expectations on growth. In Europe, the latest PMI data is being read as suggesting that recovery will be slower, compared to the forecasts existing just a few months ago.

In Mr. García Puente’s view, China “has a structural growth problem”. The major analytical firms have already downgraded that country’s expected GDP growth rate to around 3% or 3.5%, which is something he sees as normal after experiencing a period of growth above 6%. “They have decided to make some sacrifices now so that long-term growth will become more sustainable”, he adds.

In terms of his outlook for the USA, he does not see an economic crisis occurring there either. However, he points out that the industry recognizes that the markets are suffering: profit warnings for certain technologies, poor results for some major supermarkets (reflecting supply chain problems), and a series of indicators “in the red zone” for a few weeks, have pushed the American financial sector towards a “bear market” situation.

In fact, firms in the big tech category have lost as much as 50% of their value since the start of the year, stirring up bad memories of the dot-com bubble. As far as his opinion on whether that scenario could be repeated, Mr. García Puente says that he does see certain parallels with that earlier crisis: “as with the bubble, some companies have been showing a lack of earnings simultaneously with expected high cash flows. On the other hand, there are also many companies that, despite the current context and stock market losses, are still showing strong revenues and profits”.

He is reluctant to rule out any scenario (the most recent report from MAPFRE Economics on economic forecasts included recession within the shock scenario), he believes that “if these high energy prices stay with us, along with inflation that continues to rise, demand will fall”, and this could create a situation in Europe that is worse than the one we are seeing now.