Euro Area Growth Under Threat from Rising Energy Prices and Trade Tensions

The euro area GDP has shown resilience in recent times, but experts are cautious about taking steady growth for granted. The PMI reached a five-month high of 51.9 in July, and German Ifo numbers have been encouraging.

However, these survey numbers are already looking stale after the re-escalation in the Middle East. The PMIs were collected when Brent averaged $84/bbl, but since then, it has moved above $100/bbl before retracing, remaining above the $90/bbl threshold at the time of writing.

Additionally, European natural gas storage fill is at just 56%, ~10pp below this time last year, and front-month TTF is up ~35% on the month. Lower water levels in the River Rhine are set to hamper barge transport and industrial production in Germany over the summer.

External concerns include EU-China trade relationships, with the EU widening sanctions on Russia to entities located in third countries, including China. China responded by placing 14 European companies on its export control list, risking tit-for-tat escalation. The fragile trade equilibrium with the US may also become a renewed focus after Trump's administration launched a probe into EU digital services practices under Section 301.

Monetary policy-wise, MUFG Research expects an ECB rate hike in September, citing policymakers' decision to lean further against inflation risks. The recent healthy GDP release supports this case, as do the inflation numbers out so far today, a beat in Spain and higher German regional inflation rates.