Rising inflation, which reached a new all-time high of 9.1% in August, is forcing the major European funders to tighten their monetary policy.
After long minimizing the inflationary risk, the ECB is now faced with a long-term price slide. Its latest forecast announces inflation at 8.1% for this year, 5.5% in 2023 and 2.3% in 2024. Only three months ago, the ECB was still hoping for an annual price increase limited to 6.8% this year before slowing down significantly to 3.5% in 2023 and returning to its 2% target by 2024.
Clearly, the ECB has fallen on optimism in its inflation forecasts and must now urgently correct its monetary policy. Thus, a further increase in key interest rates is already expected in October. A further adjustment of 0.75% is not excluded.
Rising interest rates will not lower energy prices at the root of inflationary pressures. But it will support the euro's value on the foreign exchange market. The sharp depreciation of the single currency over the past 12 months has increased the price of imports, particularly energy, and has fuelled the price spike.
It should also be noted that the ECB has significantly lowered its growth forecasts for the euro area. Next year, the GDP increase will be limited to 0.9% against a much too optimistic forecast of 2.1%. As a result, the pessimistic scenario predicts a 0.9% decline in GDP in 2023 and higher inflation (6.9%) than in the baseline scenario.
We believe that the euro area will not escape recession in the coming quarters. Long-term economic prospects are also reduced with the war in Ukraine.
While some companies in the old continent are still worth a visit, European equities are not attractive within a diversified portfolio overall.