According to the S&P Global PMI Flash Composite Index for the euro area, activity rose in February to 52.3 points, the highest level since last Spring.
If the average for services is up (53 points), manufacturing output is out of the red and somewhat up (50.4 points).
Several reasons for this improvement
First, the recession risks are receding, at least in the immediate future, partly because fears about energy supplies this Winter have dissipated.
Then there is inflation, which remains far too high but is gradually declining, and whose impact on households, businesses and the economy has been dramatically softened thanks to the aid and subsidies offered by States to the entire private sector.
Then there is the gradual standardisation of supply chains, which allows companies to resume close to regular activity, especially in the industry. For services, labour markets continue to pose challenges, and with wages remaining upward, inflation is expected to be around for a while. But on the other hand, thanks to the excellent performance of employment and wage growth, households continue to have the means to consume and do not deprive themselves of them.
Caution is still in order
On the one hand, the energy supply will remain challenging in the coming years and replenishing gas reserves in 2023 while eliminating Russian gas will not be noticeable. On the other hand, a further surge in energy prices is therefore plausible later in the year, especially as, with the Chinese recovery, global demand is expected to rise to record highs in 2023.
On the other hand, there is little doubt that the support our economies received in 2022 was oversized. It makes little sense that the continent that suffers most from war is the one where growth is most important. However, the Eurozone ended 2022 with a GDP growth of 3.5%. This is more than 3.0% of China or 2.1% of the United States. However, the mark of this growth, primarily due to the ever-increasing public sector debt, remains to be paid.
If everything leads us to believe that the first months of 2023 will still be good bills, the interest rates that will continue to rise will eventually weigh on the private sector, which will see the disappearance one after the other of the aid it has received in recent quarters.
As a result, we expect growth to be stalled in the Eurozone in 2023 and therefore remain broadly away from Eurozone equities.
Europe still has many strategic challenges, so we prefer other stock markets. On the interest rates side, we continue to invest 10% of the neutral (balanced) portfolio in Bonds in the euro area and 5% in Bonds with high Yield in the euro area – they have a little more risk, but the premium pays off.