A Romantic Break from the European Union's Recession Fears
Following on from the IMF’s recent upward revision of GDP forecasts for 2023, the European Commission has reported today that falling gas prices, policy actions by governments, and firmer-than-expected household spending will increase EU GDP expectations this year. The growth forecast has been revised upwards from 0.3% last November to 0.8% for the EU and 0.9% for the eurozone (those EU countries that use the euro, i.e. not Bulgaria, Czechia, Denmark, Hungary, Poland, Romania and Sweden). It’s now thought that the EU will avoid a recession this year as the mild winter (January was the third warmest ever recorded) and a rapid switch to non-Russian gas supplies have helped to manage fuel costs in the last few months, along with price caps. Electricity prices by up to 80% have fallen from their Q3 ’22 peaks, according to data reported by Statista.
Average monthly wholesale electricity prices in selected EU countries.Source: Statista.
Falling energy prices have also put a lid on inflation, which the EU thinks will now fall from 8.2% last year to 5.6% this year in the eurozone and from 9.2% to 6.4% in the wider EU, with the forecast for 2024 for the eurozone down to 2.5%. The European Central Bank’s headline borrowing rate is 2.5% - great news for EU borrowers buying London property, as is sterling’s structural decline against the euro – and with this inflation news we might expect EU borrowing costs to peak after the 0.5% increase already flagged for March, especially as wage growth in the EU is muted with sufficient available labour for hire in most sectors and most countries.
One shipping sector in particular will be delighted to hear this news, that is the liner companies. After announcing a profits bonanza last year, the liners have invested in new tonnage, paid down debt and warned investors of a hard rain to fall in 2023. In January and February a number of liners have been delivering chartered-in tonnage and watched as time charter rates have fallen down the empty elevator shaft. But brokers report increased activity in the feeder segment in the last few days, as regional activity picks up both in Asia and Europe. Moreover, the Freightos Asia-Europe freight index has levelled off in the last few weeks after falling nearly every week since September 2021.
Headhaul Liner Rates Level Off. Source: Freightos
Before we break out the bunting and have a champagne breakfast for St Valentine’s Day, we might do well to remember that 0.8% (or 0.9%) GDP growth is pretty anaemic and well below the 3.5% recorded in the eurozone last year, though that number includes some rebound from the pandemic-ridden first half of 2021. Still, this is a better outlook than nearly everyone was expecting just a few weeks ago. It follows on from firm US jobs and consumer data and from the lifting of Covid restrictions in China. Any increase in overseas demand for Chinese manufactures is good news for the liners, as well as for China’s suppliers of energy and raw materials and the ships that move the energy and commodities. All in all, it's quite a relief.