Investment Institute
Viewpoint Chief Economist

Mid-summer blues


Key points:

  • The US is not yet in a “proper recession” - yet. The labour market is key there, and the Fed will want to see clear signs of deceleration in wages before lowering its guard.
  • The Euro area’s Q2 upside surprise is fragile. At 20% of capacity, the flows of gas through Nord Stream 1 create a massive risk, raising key questions for the ECB. 

With US GDP falling in Q2 for a second quarter in a row, discussions on the definition of recessions have been rife. Our view is quite simple: while indeed, the sources of contraction in 1H 2022 may be too narrow to qualify as a “proper recession”, underlying signals – in particular fading support from consumption – are concerning. Yet, significant job losses should be a key ingredient in a recession. This is missing for now – despite some early signals from jobless claims. This is key for the Fed. They have not given up on the neo-Keynesian approach. The FOMC still believes in the Phillips curve, and they want to see a deterioration in the labour market trigger a deceleration in wage growth. This will make the next few payroll prints crucial, possibly leading to significant volatility. While the market has for now decided to look through the Fed’s tightening phase, the Fed won’t want to lower its guard easily.

A stronger than expected GDP in Q2 in the Euro area came out in sharp contrast with the US. Still, the details of the upside surprise suggests that the underlying position of the Euro area remains extremely fragile. The post-reopening catch-up started later in Europe than in the US. Once this effect dissipates, we expect GDP to contract in the Euro area as well, the depth of it depending on the quantum of Russian gas flowing to the EU. In our calculations, if Russia maintains the flow of gas through Nord Stream 1 at 20% of capacity, Germany and Italy would not be able to go through the winter without rationing, the quantum of which – and hence of the associated recession – would depend on some resource-pooling at the EU level. Unfortunately, the 20% trickle may be the optimal level from Moscow’s point of view, allowing Russia to retain massive pressure on the West and decent hard currency receipts given the rise in prices. The behaviour of the ECB in a recession triggered by gas rationing would be key. For now, it seems their natural slope would be to hike further. It may take time for the hawkish rhetoric to be toned down, but the market is impatient.


NB: Macrocast is taking its August recess. We wish our readers a great summer break.

Download the full insight
Download insight (513.32 KB)

Related Articles

Viewpoint Chief Economist

One Week at a Time

Viewpoint Chief Economist

Draghi Captures the Zeitgeist

Viewpoint Chief Economist

Zoom on the Boom

    Disclaimer

    This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers before making any investment decision.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.

    Some of the Services and/or products may not be available for offer to retail investors.

    This publication has not been reviewed by the Monetary Authority of Singapore.