“European Commission cuts the EU’s growth forecast…”

The European Commission has cut its forecast for economic growth for the current year and next year whilst also revised up its estimates for inflation mainly due to the war in Ukraine.  The EU executive is now predicting growth of 2.6% for the 19-country within the EU economy slightly less than the 2.7% forecast in May.  Meanwhile the forecast for next year is 1.4% instead of the 2.3% previously estimated.  Meanwhile, for the wider 27-country European Union, the growth forecast was unchanged at 2.7% this year.  Furthermore, the Commission has raised the estimates for eurozone inflation which is expected to reach 7.6% before dropping to 4% in 2023.  The Commission also advised that headline inflation could even increase further if gas prices had to rise due to Russia cutting off supplies.  However, the Commission stressed that the eurozone was not expected to go into a recession and the forecasts could improve if the recent decline in oil and commodity prices continued.  Nevertheless, according to the commission, with strong labour market at historical low unemployment rates, private consumption could prove more resilient to inflationary pressures if households had to use more of their accumulated savings. Meanwhile, whilst Germany would see growth slowing to 1.4% this year (1.3% in 2023), France is expected to grow by 2.4% this year lower than the 3.1% originally forecasted.  Concurrently, amongst the three largest economies within the EU, Italy is the only one that is expected to grow this year by more than forecasted at 2.9%.  However, next year Italy is expected to slow down as growth Is expected at 0.9%, the lowest within the eurozone. 

EUR and US Dollar Closer to Parity

On Monday the euro was nearly in parity with the dollar as the single pipeline carrying Russian gas to Germany entered annual maintenance, and flows are expected to stop for 10 days.  There are concerns amongst investors that the situation could be prolonged amid the war in Ukraine, restricting European gas supply further and adding to the possibility of the European economy going into recession.  The euro dropped to $1.015 per dollar as the dollar gained on greater risk aversion of investors.  Meanwhile, on Wednesday the euro dropped below parity against the dollar for the first time in almost 20 years, as a hawkish approach by the FED and growing risks of recession within the EU continued to impact the currency.  The EUR started this year on a strong note with a post COVID-19 economic recovery, however Russia’s invasion of Ukraine and the surging European gas prices and concerns that Moscow could cut supplies further raised the fears of recession.  The euro hit $0.9998 its lowest level since December 2002. So far this year it lost more than 10%.  Since becoming freely available in 1999, the euro has very few times been below parity. The last time it dropped was between 1999 and 2002, when it moved to a record low of $0.82 in October 2000.  The Euro is the second most sought after currency in global FX reserves.  Furthermore, the euro/dollar is the highest among currencies in the global $6.6 trillion-per-day market.  The slide of the euro is an issue for the ECB as it will trigger further inflation.  However, with increasing interest rates the situation of a recession could be enhanced.  Meanwhile the ECB has played down the issue, arguing that it has no exchange rate target.   

In Italy, Draghi wins confidence vote

On Thursday the Italian government won a confidence motion in the upper house of parliament amid measures to hep counter the cost of living however, the 5-Star Movement threatened to boycott the vote.  Earlier in the week, Draghi said that his government could not continue without the support of the 5-Star and ruled out a coalition.  Meanwhile, President Sergio Mattarella will have to decide on the action to take to solve the issue.  Amongst the available options, Mattarella could ask Draghi to try and put his administration back together with a fresh confidence vote.  However, should majority not be reached, parliament will have to be dissolved and early elections called. 

IMF cuts US growth forecast for 2022

The International Monetary Fund on Tuesday warned that avoiding recession in the US will be challenging as it has again cut its 2022 US growth forecast to 2.3% from 2.9% in late June amid weak consumer spending.  Furthermore, the IMF has cut its 2023 real GDP growth forecast to 1% from 1.7% on 24 June when US officials met for an annual assessment of US economic policies.  IMF executive directors said in a statement that the broad-based inflation increase was “posting systemic risks to both the US and the global economy”.  The IMF further added in the staff report, “The policy priority must now be to expeditiously slow wage and price growth without precipitating a recession.”  The IMF also said that monetary policy tightening by the FED should help bring down inflation to 1.9% by the fourth quarter of 2023.  Whilst this will slow US growth, the IMF still predicted the US will avoid recession. 

US Weekly Jobless Claims

The number of Americans filing new claims for unemployment benefits increased for a second straight week last week indicating that the labour market is cooling amid more restrictive policies. The initial claims for state unemployment benefits jumped 9,000 to a seasonally adjusted 244,000 for the week ended 9 July said the Labour Department.  Some layoffs took place in the housing that are interest-rate sensitive and in manufacturing industries.  At the end of May, there were 11.3 million job openings with nearly 2 job openings for every unemployed person.  The claims report also showed that the number of people receiving benefits after an initial week of aid dropped 41,000 to 1.331 million during the week ending 2^nd July. 

China’s Economy

China’s economy slowed sharply in the second quarter reflecting the affect of the COVID lockdowns and indicate the pressures for the months ahead from a gloomier outlook.  Gross domestic product in the April-June quarter grew by 0.4% from a year earlier showed official data on Friday.  Full or partial lockdowns were imposed in major centres across the country in March and April, including in Shanghai.  This saw a year-on-year contraction of 13.7% in GDP in the second quarter.  Output in Beijing shrank by 2.9% year-on-year in the same quarter.  Although many curbs have since been removed, and data for June showed signs of improvement, analysts are not expecting a rapid economic recovery. Nevertheless, China’s property market is in a deep slump and global outlook looks gloomier. 

Gold

Gold steadied on Wednesday after dropping to a more than nine-month low, while investors were awaiting inflation data for any indications on the FED’s tightening policy. Spot gold rose by 0.1% to $1,728.09 per ounce after dropping to its lowest since end of September at $1721.98 earlier in the session.  Meanwhile, a higher-than-expected inflation could underpin market expectations for a 75-basis point interest rate hike by the FED later this month, as the central bank aims to combat inflationary pressures.  Gold is seen as an inflationary hedge.  Increased interest rates will draw investors away from gold, as they tend to lift bond yields and hence rise the opportunity cost of holding zero-yield gold. 

Oil

Oil prices dropped on Monday with Brent crude futures dropping to $105.39 after climbing 2.3% on Friday while US West Texas Intermediate crude futures declined by 2.1% to $102.62.  Markets were impacted by the news that China had discovered its first case of the highly transmissible Omicron subvariant in Shanghai and that new cases had jumped to 63 from 52 a day earlier.  The discovery of the new subvariant and the larger number of daily cases in Shanghai since May could lead to another round of mass testing that could impact demand.  Global benchmark Brent crude dropped below $100 a barrel for the first time in three months amid a strengthening dollar, the COVID-19 curbs in China and the fears of a global slowdown.  Since their peak in March this year, Brent has dropped by 29% while WTI has fallen 27%.  In view that oil is generally priced in US dollars, a stronger dollar makes the commodity more expensive to holders of other currencies.  Furthermore, the dollar is perceived by investors as a safe haven in times of market volatility.

US Consumer Prices   

US consumer prices accelerated in June as food and gasoline remained expensive, leading to the largest annual increase in inflation in 40 ½ years and making a case for the FED to further increase interest rates by 75 basis points later this month.  According to the Labour Department the consumer price index increased by 1.3% last month after the 1% increase in May. Consumer prices are increasing amid the supply chain issues and the massive fiscal stimulus from governments during the pandemic.  Furthermore, the situation has become worse with the war in Ukraine.  The inflation data followed stronger than expected job growth in June. The government report, issued on Friday of last week, showed that the economy has created 372,000 jobs last month, with a broader measure of unemployment dropping to a record low.  Meanwhile, in the 12 months through June, the CPI climbed 9.1%.  That was the largest gain since November 1981 and followed an 8.6% in May.  Underlying inflationary pressures remained strong last month as excluding the volatile food and energy components, the CPI gained 0.7% in June after climbing 0.6% in May. 

Malta:  Residential Property Transactions – Q2/2022

A press release dated 11 July 2022 shows that the number of final deeds of sale relating to residential property amounted to 1,169 during June 2022, representing a 5.6% decline when compared to those of a year earlier. The value of these deeds was higher by 9.1%, amounting to EUR 274.4 million.  Meanwhile, in the second quarter of 2022, 3,543 final deeds of sale were registered at an annual decrease of 1.5%.  The value of the deeds registered during this period declined by 4.8% over the same quarter of the previous year and amounted to EUR 781.4 million. 

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