The European benchmark Dutch TTF natural gas futures price rose nearly 17% on October 9th, marking the largest increase in two months. The cause was the sudden outbreak of a new wave of intense conflict between Palestine and Israel. The Israeli Ministry of Energy instructed Chevron to temporarily close its offshore natural gas platform Tamar near Gaza, which exports some of Tamar's natural gas to Europe. The market is concerned that the situation between Palestine and Israel will reduce the natural gas supply from the Middle East to Europe. In addition to the unstable situation in the Middle East, the risk of natural gas supply in other places is also increasing. Workers at Chevron Australia's liquefied natural gas facility resumed a strike on October 9th, which is believed to disrupt supply and drive up prices. In Europe, the Baltic connector, an underwater natural gas pipeline located in the Baltic Sea region connecting Finland and Estonia, was also closed on the 8th due to suspected leaks. As winter approaches, these series of events have raised concerns about the safety and supply of natural gas infrastructure in Europe.
The high energy prices, high inflation rates, and the European Central Bank's benchmark interest rate of 4.5% have led the International Monetary Fund (IMF) to lower its expectations for European economic growth. On October 10th, the latest World Economic Outlook report released by the IMF predicted that economic growth in several European countries, including the Netherlands, Germany, and Austria, would approach stagnation. The IMF has lowered the Netherlands' economic growth forecast for 2023 from 1% to 0.6%, and for 2024 to 1.1%; Maintain the forecast of 2.5% economic growth in Spain in 2023, but lower the growth forecast for 2024 from 2% to 1.7%. The IMF predicts that Germany's economy will shrink by 0.5% in 2023; Austria's economy grew by only 0.1% in 2023 and 0.8% in 2024. The IMF stated that the economic slowdown in these countries is closely related to high inflation and significant interest rate hikes by central banks.
The Economic and Financial Outlook Report for the Fourth Quarter of 2023 released by the International Research Institute of Bank of China in Beijing recently expressed the same concerns: European economic growth remains weak, and economic operating pressure increases in the fourth quarter. It is expected that the economic growth rates of the Eurozone and the UK will be around 0.6% and 0.3% respectively in 2023.
In the first half of 2023, the European economy performed better than expected. According to the latest data released by the Eurostat in September, the quarter on quarter GDP of the eurozone increased by 0.1% in the second quarter, which is consistent with the previous quarter. However, this growth rate is 0.2 percentage points lower than the initial value announced in July, indicating that the recovery momentum of the eurozone is still fragile. In terms of sub items, the service sector and consumption that supported the economic performance of the eurozone in the early stage tend to be weak. In June, the output of the service sector decreased by 0.5% month on month, while retail sales unexpectedly decreased by 0.3% month on month. Investment and industrial output rebounded. The contribution of fixed assets investment to GDP growth was positive for two consecutive quarters. In June, the euro zone industrial output grew 0.5% higher than expected month on month. However, the credit survey data of the European Central Bank in the third quarter shows that investment demand will further decline in the future, and investment spending may face a contraction. Exports rebounded, with the eurozone's export surplus rebounding significantly to 12.5 billion euros in June. Among them, the export performance of the service industry is relatively good, and the IMF believes that the recovery of the tourism industry will become an important support for the economic growth of the Eurozone in 2023.
The UK economy also outperformed expectations, with GDP growth of 0.2% month on month in the second quarter, the best performance in over a year, with three consecutive quarters of positive month on month growth. The "particularly strong" performance of the manufacturing industry is the main reason for the UK economy exceeding expectations. In the second quarter, the UK manufacturing output increased by 1.6% month on month, mainly due to the strong output of the automotive manufacturing industry. According to the Association of Automobile Manufacturers and Traders (SMMT) data, the UK automotive manufacturing output increased by 16.2% year-on-year in June. Meanwhile, wage growth in the UK reached a record 7.8% in the second quarter, with household income growth exceeding inflation, leading to strong growth in household real income and consumption. Consumer spending increased by 0.7% month on month, marking the largest quarterly increase in over a year.
The main members show differentiation. According to data released by the Eurostat, in the second quarter, the GDP of France and Spain increased by 0.5% and 0.4% month on month, respectively, making them the main members supporting the economic growth of the European Union. As the locomotive of the eurozone economy, Germany's economy experienced zero growth, Italy's economy unexpectedly contracted month on month, and members such as the Netherlands, Sweden, and Poland also experienced a recession.
The downward speed of inflation is slowing down and may face new cost pressures. In August, the Harmonized Consumer Price Index (HICP) of the Eurozone increased by 5.3% year-on-year, unchanged from the previous month, and the downward trend of inflation ceased. Excluding food and energy prices, HICP increased by 5.3% year-on-year, a decrease of 0.2 percentage points from the previous month, and is still at a high level. Inflation in the UK has declined, with the CPI increasing by 6.8% year-on-year in July, narrowing by 1.1 percentage points compared to the previous month. However, the core CPI remains unchanged at 6.9%, and inflation levels remain relatively high compared to other developed economies. Affected by factors such as the expansion of global energy demand and the reduction of production in major energy exporting countries, the global crude oil supply and demand tension has intensified. Recently, global energy prices have significantly rebounded, and it is expected that global energy prices will be relatively high by the end of the year. Considering that the downward trend in energy prices was the main reason for the easing of inflation in the European region before, and the possibility of a resurgence of inflationary pressure in Europe in the future, the risk of the European Central Bank being more hawkish than expected should not be underestimated in this context.
The pressure on European economic growth is constantly increasing. According to data released by IHS Markit, the comprehensive PMI of the Eurozone in August was 46.7%, lower than the previous month's 48.6%, setting a new low since May 2020 and falling below the boom and bust line for three consecutive months. The PMI of the service industry decreased from 50.9% to 47.9%, shrinking for four consecutive months; The manufacturing PMI has rebounded from 42.7% to 43.5%, the first improvement in seven months, but still in a contraction range. In August, the economic prosperity index of the 20 countries in the eurozone decreased by 1.2 points to 93.3, which is the lowest level since 2021. Meanwhile, the inhibitory effect of high interest rates on the economy may become increasingly apparent. In September, the European Central Bank raised interest rates by 25 basis points and proposed that policy interest rates would remain at a sufficiently high level for a sufficiently long period of time. The impact of monetary policy tightening on the European economy will continue to be released. In the potential scenario of further interest rate hikes and longer peak interest rate durations, the tightening of residential financing conditions in the future may have more negative impacts on consumer spending and investment expectations in the eurozone, and may have a more significant inhibitory effect on economic growth. In the next stage, the European economy may face a more complex situation.
Even ECB President Lagarde stated at a hearing of the European Parliament's Economic and Monetary Affairs Committee at the end of September that economic activity in the eurozone generally stagnated in the first half of 2023, with recent indicators indicating further weakness in the third quarter. Lagarde said that the decline in export demand in the eurozone and the tightening of the financing environment are suppressing economic growth. The service industry is also weakening, and the rate of job creation in the service industry is slowing down.