The Day at a Glance | Aug 23 2022

The Top

*The Eurozone´s economy receded for a second consecutive month.

*OPEC+ could be forced to cut crude oil production to maintain stability in prices: Abdulaziz bin Salman, Saudi Minister of Energy.

*Economic activity decreased in Australia and Japan during August and reinforced expectations of a global recession.

*Close to two thirds of Europe faces droughts or risks of droughts: Reuters.

*Economic indicators: US PMI´s for August are expected to log their second monthly contraction (49).

Economic environment

Economic contraction in Europe. The European economy´s PMI´s for August logged a contraction in economic activity for a second consecutive month. The Composite PMI fell deeper into contractionary territory (49.2) and was dragged down by great weakness in the manufacturing sector (48.2) and stagnation in the services sector (50.2). The data increases the likelihood of seeing a recession in the Eurozone towards the end of the year as the slowdown in China and the war in Ukraine affect the manufacturing sector and high inflation shrinks demand and consumer spending in the services sector. The rebound in activity in services since the pandemic has come to an end – along with higher prices among energy and food related goods; while production chains and demand in manufacturing are still being affected by what´s going on in China and Ukraine. Both of the European block´s largest economies logged contractions, with Germany recording great weakness (the largest monthly drop since the pandemic) and two consecutive months of economic contraction due to its dependency on manufacturing activities (49.8). Everything points towards a contraction in GDP during the 3Q22, which could lead towards another in the 4Q22, especially if restrictions on Russia´s supply of natural gas continues and Europe is forced to decrease energy consumption – then affecting production and reinforcing the upwards trend in prices. At the moment, economic weakness is not expected to stop the ECB from increasing interest rates aggressively in September (50bp) as inflation remains at record-high levels. However, the ECB now faces a stagflation dilemma.