The performance of Eurozone’s economy has been underwhelming, particularly evident in its Q3 GDP report, which showed a quarter-over-quarter decline of 0.1%. Wells Fargo says that these trends have raised concerns about the possibility of the Eurozone slipping into a recession.
“One notable area of weakness has been consumer spending. That said, we believe the worst of the consumer slowdown may now have largely passed, as real household income trends have turned more positive and household interest costs have risen only moderately,” says Nick Bennenbroek, Managing Director and International Economist at Wells Fargo.
“We do, however, expect a further slowdown in investment spending given slowing corporate profit growth and declining capacity utilisation rates,” he adds.
On the business front, the financial services company highlights that corporate profits have shown signs of softening, and this may impact investment spending. Bennenbroek suggests that while employment growth is expected to continue in Eurozone’s economy, there may be a moderate slowdown.
Subsequently, he points out that indicators like Eurozone capacity utilisation, particularly in the manufacturing sector, have also shown a decline, pointing to a potential decrease in investment spending. Wells Fargo also informs that the Eurozone banking sector has experienced a slowdown in lending to non-financial corporates, indicating a reduced appetite for investment.
Additionally, the financial services company highlights that the future of the Eurozone’s economy hinges on the balance between consumer spending and investment spending. Monitoring indicators such as monthly retail sales, quarterly corporate profits, and capacity utilisation will be crucial to gauge the economy’s trajectory, it adds.
Furthermore, Bennenbroek contends that the European Central Bank (ECB) is expected to halt any monetary tightening, and there is even speculation of rate cuts if the Eurozone enters a recession. “Overall our main takeaway is that, relative to the consensus economist forecast or market implied pricing, we believe the risks are tilted toward the ECB lowering interest rates earlier, or more aggressively, than generally expected,” concludes Wells Fargo.
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