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Climate-Induced Threats to Europe’s Economy

Avatar photo Brandon Foster on September 14, 2023

The Rising Climate Risks

In this section, we’ll explore the increasing threats posed by extreme heat, wildfires, and floods to Europe’s economy.

Europe is facing a growing menace – the impacts of extreme heat, wildfires, and floods are looming large, and they could pose substantial threats to the region’s economy. The European Commission recently sounded the alarm, warning that these mounting climate risks might start to take their toll as early as this year.

Downgraded Economic Predictions

Let’s delve into how these climate risks have influenced economic forecasts for the coming years.

In its latest economic forecast, the European Union’s executive arm, the European Commission, revised its growth predictions for the region in 2023 and 2024 downwards. However, even these less optimistic forecasts might not capture the full extent of the looming challenges.

The Cost of Climate Risks on the Economy

In this section, we’ll examine the potential costs that these climate risks could impose on the European Union’s economy.

The European Commission emphasizes that the realization of these climate risks comes with a hefty price tag for the EU economy. This cost encompasses not only losses in natural capital but also a deterioration of economic activity, including the crucial tourism sector.

Impact on GDP Growth

Let’s explore how these climate-induced challenges are affecting the European Union’s Gross Domestic Product (GDP) growth.

The European Commission’s revised expectations for GDP growth paint a sobering picture. The projection for this year has been adjusted to a mere 0.8% growth, down from the previously forecasted 1%. Similarly, next year’s growth prospects have been scaled back from 1.7% to 1.4%. Weak domestic demand, fueled by high inflation and rising interest rates, is cited as the primary reason for these downgrades. However, the Commission acknowledges significant uncertainty surrounding these forecasts, with extreme weather events being a significant concern.

Tourism Takes a Hit

In this section, we’ll analyze the impact of climate-related challenges on the tourism industry, a crucial part of the European economy.

Tourism plays a pivotal role in some European countries, contributing up to a fifth of their annual GDP. However, scorching temperatures in southern Europe and record-breaking summers are causing Europeans to reconsider their vacation plans. This year, there has been a 10% drop in European tourists planning trips to Mediterranean destinations. Conversely, countries with milder weather, such as the Czech Republic, Bulgaria, Ireland, and Denmark, are experiencing a surge in popularity among travelers. Even tourists from outside the EU are shifting their preferences toward cooler northern destinations due to continental Europe’s heatwaves.

Environmental Impact on Tourism

Let’s explore how global warming can further impact the tourism sector through beach erosion and wildfires.

Global warming poses a dual threat to tourism. It accelerates the erosion of beaches, a vital attraction for coastal destinations, and amplifies wildfires that devastate forests, which are also part of Europe’s “natural capital.” Rising temperatures put the EU’s third-largest economy at risk, with tourism and agriculture being the most exposed sectors, as highlighted by the Bank of Italy in a study published last October.

Agricultural Challenges

In this section, we’ll discuss the challenges faced by agriculture, particularly the olive oil industry.

The scorching temperatures have already had adverse effects on olive trees for two consecutive years, leading to concerns of soaring prices and potential shortages of olive oil. In Spain, the world’s largest olive oil producer, production has plummeted. The full extent of the damage won’t be known until the harvest season in October and November, but European olive oil production could drop by over 30% compared to its five-year average.

Broad Economic Vulnerabilities

Let’s examine how sectors beyond tourism and agriculture, such as construction and manufacturing, are vulnerable to extreme heat.

Construction and manufacturing sectors are also susceptible to the impacts of extreme heat. Southern Europe’s prolonged exposure to temperatures exceeding 40 degrees Celsius for several days can significantly disrupt economic activities, affecting economies more broadly.

International Concerns

In this section, we’ll discuss international perspectives on the economic risks associated with climate change.

The International Monetary Fund (IMF) has also voiced grave concerns about the economic well-being threatened by climate change. IMF Managing Director Kristalina Georgieva called upon G20 members to lead by example in fulfilling promises of $100 billion per year for climate finance. She emphasized the need for countries to mobilize domestic resources to finance the green transition through tax reforms, efficient public spending, strong fiscal institutions, and robust local debt markets.

CPI set to influence the Fed’s 2023 plans for inflation

Avatar photo Jeah Lorraine Adams on September 14, 2023

CPI: Consumer inflation is anticipated to have fallen in December compared to November after a problematic 2022 driven by inflation and high costs.

The sudden drop in energy and fuel costs brought on the decline.

However, the yearly rate would likely remain high.

According to Dow Jones, analysts anticipate a monthly decline in the consumer price index of 0.1%.

In the meantime, a 6.5% increase in inflation is presumed.

Despite the reports, the CPI remained below its all-time high of 9.1% in June 2022.

CPI vs Core CPI

The consumer price index measures the average yearly change in prices of consumer goods and services.

Costs associated with food and energy are removed from the core CPI because they alter more frequently than other products.

This limitation is crucial because it may take time to determine the underlying price trend when food and energy expenses vary significantly from month to month or year to year.

Since it is less impacted by short-term changes in food and energy costs, the core CPI is seen as a more reliable inflation index.

It is anticipated to increase by 0.3% in December, reflecting a 5.7% annual growth.

The core CPI increased by 6% annually and 0.2% monthly in November.

Diane Swonk, the chief economist at KPMG, praised the projected drop.

“We welcome it with open arms. It’s good news,” said Swonk.

“It’s great and it helped to fuel consumer spending in the fourth quarter. But it’s still not enough.”

Slowed inflation outlook

The CPI will be released on Thursday, the last batch of data, before the Federal Reserve decides on interest rates on February 1.

The relevance of the inflation rate on the financial markets has increased lately.

Traders predict the CPI to reflect less inflation than analysts expect.

They cited the weaker-than-expected wage increase in the December employment report and other data points that signaled lower inflation expectations.

Stocks rose before the results were made public on Wednesday, which worried Peter Boockvar, the chief investment officer at Bleakley Financial Group.

“The market is looking at it as glass half full. Inflation is rolling over, and the Fed is almost done raising interest rates,” he said.

“I think they remember the last two months when you had numbers that were well below expectations. They’re just assuming that’s going to be the case again.”

Read also: The Fed needs freedom to make hard decisions

The Fed impact

Traders continue to wager on the central bank raising interest rates by a quarter point at its upcoming meeting in the futures market.

Policymakers are expected to raise the fed funds target rate by 0.5 percentage points, according to economists.

20% of the market anticipates a hike of 50 basis points.

State Street Global Advisors’ head economist, Simona Mocuta, saw commotion surrounding a particular data point.

“It’s amazing how much reaction and over a single data point,” she mused. “Clearly, the CPI is very important.”

“In this particular case, it does have fairly direct implications, which are about the size of the next Fed rate hike.”

According to Mocuta, the Fed may be swayed by a lower CPI.

“The market has not priced the full 50. I think the market is right in this case,” she explained.

“The Fed can still contradict the market, but what the market is pricing is the right decision.”

According to Luke Tilley, chief economist at Wilmington Trust, the decline in energy costs and the 12% decline in gasoline prices in December reduced inflation.

The CPI has not reflected a deceased pace, even though the rental market suggests a drop.

“Shelter is the main focus because of the lag,” said Tilley. “Everyone is familiar with the lag that it takes for the data to show up in the CPI.”

“We think there could be a sharper slowdown.”

Nearly 40% of the core CPI comprises housing costs, which are anticipated to increase by 0.6% per month.

Luke Tilley claims that landlords have complained that as the housing market gets worse, it is getting harder for them to boost rent.

“We’re pencilling in slower increases in January and February and March on that shorter leg.”

Focus on services

Economic experts have concentrated on growing service inflation in the CPI since goods inflation is likely to continue shrinking because of the stabilized supply chain.

“The headline monthly changes over the last two, three months overstate the improvement,” said Simona Mocuta.

“We’re going to get the same help from gasoline in the next report. I don’t want to see an acceleration in shelter. I want to see some of the discretionary areas show deceleration.”

“I think right now the focus is very much on the services side.”

The market is now concentrating on the Fed’s capacity to control inflation since it may affect how much further interest rates are hiked.

The economic slowdown brought on by the hike might be the discrepancy between a recession and a soft landing.

“The hope is that basically, we are now in a position where you could envision a soft landing,” said Diane Swonk.

“That requires the Fed to not only stop raising rates but ease up sooner, and that doesn’t seem to be where they’re at.”

“The Fed is hedging a different bet than the markets are. This is where nuance is really hard. You’re in this position where you’re improving,” she continued.

“It’s like a patient is getting better, but they’re not out of the hospital yet.”

Reference:

Inflation is expected to have declined in December, but it may not be enough to stop the Fed

Jobs market turns up with great results in 2023

Avatar photo Brandon Foster on September 5, 2023

Jobs – On Friday, the American jobs market once more proved its resilience and outperformed forecasts.

Market growth outperformed forecasts by more than three times, rendering recessionary estimates absurd.

What happened

Analysts anticipated that the US economy likely generated 185,000 jobs in January in a joint estimate that was published last week.

The news is positive because the amount would have been higher than the pre-pandemic average.

But as it turned out, the economy was erratic, replacing it with almost 500,000 new jobs.

The report

American economists were shocked to learn on Friday morning that the country gained 517,000 jobs in January.

Experts anticipated a slight increase in the unemployment rate.

As opposed to that, it dropped from 3.5% to 3.4%.

Furthermore, the economy as a whole is still performing well despite high-profile cutbacks in the media and technology industry.

Other significant changes include:

  • A rise in employment across the board, particularly in the hospitality and leisure sectors.
  • After the changes, the number of jobs added in the US in 2022 was 4.8 million, which was 300,000 higher than anticipated.
  • It was more than anticipated that wages rose by 4.4% from a year earlier.

A weakening recession forecast

Because it seemed like the economy was headed in that direction in 2022, everyone was troubled by recessionary fears the whole year.

Today’s experts and economists claim that they overestimated the forecasts.

Mark Zandi, chief economist of Moody’s Analytics, said:

“Any concern the economy is in recession or close to a recession should be completely dashed by these numbers.”

Read also: Shell generates double profits from 2022

Many people were concerned about the Federal Reserve’s attempts to lower inflation by reducing the amount of currency in circulation.

Regulations frequently make a recession more likely by stifling business growth (or, in some circumstances, stopping it altogether).

Despite the rising inflation, the Fed’s actions have not caused the labor market to tremble.

“Last year involved the biggest mis-reading [SIC] of the economy in the labor market,” Justin Wolfers, an economist, tweeted on Friday.

“The recession talk spiked to new highs, even as the economy recorded a rate of job growth that any real economist will tell you spelled ‘BOOM.'”

The pandemic has compelled economists to break from the ordinary, although in the past they have relied on a range of models to make their forecasts.

“My meta-theory of why so many people have been wrong about the economy for so long is that many economists (and econ journos) are incapable of acknowledging that sometimes, good things happen,” said Wolfers.

The Feds and hiking rates

The news will be positive for the workforce, but Wall Street isn’t as excited.

Stocks fell on Friday morning as a result of investors’ surprise at the jobs report, a hint that high interest rates, which lower corporate profitability, aren’t going anywhere soon.

The Fed made it apparent that it will maintain raising rates in an effort to reduce inflation to its objective of about 2% and drain the economy of excess liquidity.

Inflation has been falling since last summer, when it peaked at 9.1%.

The PCE index, the Fed’s preferred method of gauging price increases, increased from the previous year in December.

The labor market’s strong tolerance for the Fed’s most aggressive policy in recent memory demonstrates that the institution is free to keep interest rates high without causing unemployment and widespread job cuts.

However, the economy is not entirely safe.

The rising interest rate makes it difficult for people to make loans, which is bad news for anybody trying to finance a company, purchase a home, or take out school loans.

Sung Won Sohn, director of SS Economics and a professor of finance and economics at Loyola Marymount University, said in a message on Friday:

“A rolling recession – where various sectors of the economy take turns contracting rather than simultaneously – is in progress.”

Workers market

According to the most current job data, early signs indicate that it is still a worker’s market.

In December, there were 11 million more opportunities available than expected and since July, according to the Job Openings and Labor Turnover Survey (JOLTS), which was published on Wednesday.

Due to the pandemic, office occupancy has been falling for the previous three years, but it has just just started to rise.

Office occupancy rates in ten major US cities have reached 50% for the first time since March 2020, according to Kastle Systems’ security-card swap data.

Jobs market turns up with great results in 2023

Avatar photo Brandon Foster on July 10, 2023

Jobs – On Friday, the American jobs market once more proved its resilience and outperformed forecasts.

Market growth outperformed forecasts by more than three times, rendering recessionary estimates absurd.

What happened

Analysts anticipated that the US economy likely generated 185,000 jobs in January in a joint estimate that was published last week.

The news is positive because the amount would have been higher than the pre-pandemic average.

But as it turned out, the economy was erratic, replacing it with almost 500,000 new jobs.

The report

American economists were shocked to learn on Friday morning that the country gained 517,000 jobs in January.

Experts anticipated a slight increase in the unemployment rate.

As opposed to that, it dropped from 3.5% to 3.4%.

Furthermore, the economy as a whole is still performing well despite high-profile cutbacks in the media and technology industry.

Other significant changes include:

  • A rise in employment across the board, particularly in the hospitality and leisure sectors.
  • After the changes, the number of jobs added in the US in 2022 was 4.8 million, which was 300,000 higher than anticipated.
  • It was more than anticipated that wages rose by 4.4% from a year earlier.

A weakening recession forecast

Because it seemed like the economy was headed in that direction in 2022, everyone was troubled by recessionary fears the whole year.

Today’s experts and economists claim that they overestimated the forecasts.

Mark Zandi, chief economist of Moody’s Analytics, said:

“Any concern the economy is in recession or close to a recession should be completely dashed by these numbers.”

Read also: Shell generates double profits from 2022

Many people were concerned about the Federal Reserve’s attempts to lower inflation by reducing the amount of currency in circulation.

Regulations frequently make a recession more likely by stifling business growth (or, in some circumstances, stopping it altogether).

Despite the rising inflation, the Fed’s actions have not caused the labor market to tremble.

“Last year involved the biggest mis-reading [SIC] of the economy in the labor market,” Justin Wolfers, an economist, tweeted on Friday.

“The recession talk spiked to new highs, even as the economy recorded a rate of job growth that any real economist will tell you spelled ‘BOOM.'”

The pandemic has compelled economists to break from the ordinary, although in the past they have relied on a range of models to make their forecasts.

“My meta-theory of why so many people have been wrong about the economy for so long is that many economists (and econ journos) are incapable of acknowledging that sometimes, good things happen,” said Wolfers.

The Feds and hiking rates

The news will be positive for the workforce, but Wall Street isn’t as excited.

Stocks fell on Friday morning as a result of investors’ surprise at the jobs report, a hint that high interest rates, which lower corporate profitability, aren’t going anywhere soon.

The Fed made it apparent that it will maintain raising rates in an effort to reduce inflation to its objective of about 2% and drain the economy of excess liquidity.

Inflation has been falling since last summer, when it peaked at 9.1%.

The PCE index, the Fed’s preferred method of gauging price increases, increased from the previous year in December.

The labor market’s strong tolerance for the Fed’s most aggressive policy in recent memory demonstrates that the institution is free to keep interest rates high without causing unemployment and widespread job cuts.

However, the economy is not entirely safe.

The rising interest rate makes it difficult for people to make loans, which is bad news for anybody trying to finance a company, purchase a home, or take out school loans.

Sung Won Sohn, director of SS Economics and a professor of finance and economics at Loyola Marymount University, said in a message on Friday:

“A rolling recession – where various sectors of the economy take turns contracting rather than simultaneously – is in progress.”

Workers market

According to the most current job data, early signs indicate that it is still a worker’s market.

In December, there were 11 million more opportunities available than expected and since July, according to the Job Openings and Labor Turnover Survey (JOLTS), which was published on Wednesday.

Due to the pandemic, office occupancy has been falling for the previous three years, but it has just just started to rise.

Office occupancy rates in ten major US cities have reached 50% for the first time since March 2020, according to Kastle Systems’ security-card swap data.

Image source: CBS Report

Bank stocks have become a prospect amid recession fears

Avatar photo Alice Blake on March 16, 2023

…

Bank stocks – Experts estimate that major economies will either slow down or fall into a recession.

As a result, investors today are abandoning tradition in 2023, piling into major bank stocks.

Banks

Between January and late February, the Stoxx Europe 600 Banks index, consisting of 42 major European banks, climbed by 21%.

It hit a five-year high, outperforming the Euro Stoxx 600, its broader benchmark index.

Meanwhile, the KBW Bank tracks 24 of the leading US banks, and it rose by 4% in 2023, slightly outpacing the broader S&P 500.

Following the lows last fall, the two bank-specific indexes have surged.

The economy

However, the economic picture is less encouraging.

The United States and the European Union’s biggest economies are projected to grow sluggishly compared to last year.

Meanwhile, the UK output is expected to decrease.

According to former Treasury Secretary Larry Summers, a sudden recession at some point is risky for the United States.

However, central banks were forced to raise interest rates following the widespread economic weakness coinciding with high inflation.

Regardless, it has been a bonus for banks, allowing them to make larger returns on loans to households and businesses as savers deposit more money into their savings accounts.

While rate hikes have anchored big banks’ stocks, fund managers and analysts said that great confidence in their ability to endure economic storms after the 2008 global financial crisis has also played a role.

“Banks are, generally speaking, much stronger, more resilient, more capable to [withstand] a recession than in the past,” said Roberto Frazzitta, the global head of banking at Bain & Company.

Interest rate increases

Last year, policymakers launched campaigns against the increasing inflation as interest rates in major economies increased.

The steep hikes followed a period of low borrowing costs that began in 2008.

The financial crisis ruined economics, prompting central banks to slash interest rates lows to incentivize spending and investment.

For more than a decade, central banks barely budged.

Investors don’t typically bet on banks in an environment where lower interest rates typically feed into lower lender returns.

Thomas Matthews, a senior markets economist at Capital Economics, said:

“[The] post-crisis period of very low interest rates was seen as very bad for bank profitability, it squeezed their margins.”

However, the rate hiking cycle from 2022, coupled with a few signs of easing up, changed investors’ calculations.

On Tuesday, Fed Chair Jerome Powell said interest rates would rise higher than anticipated.

Read also: Fitch Ratings warns of downgraded credit ratings

Returning investors

Due to the higher potential shareholders’ returns, investors have been drawn back.

For example, Ciaran Callaghan, the head of European equity research at Amundi, said the average dividend yield for European bank stocks is currently at around 7%.

According to Refinitiv data, S&P 500’s dividend yield currently stands at 2.1% while Euro Stoxx 600 is 3.3%.

Additionally, European bank stocks rose sharply in the past six months.

Thomas Matthews attributed Capital Economics’ outperformance to US peers based on how interest rates in the countries using euros are closer to zero than in the United States, which means investors have more to gain from the increasing rates.

He also noted that it could be due to Europe’s remarkable reversal of fortune.

Wholesale natural gas prices in the region hit a record high last August, but they have since tumbled to levels prior to the Ukraine war.

“Only a few months ago, people were talking about a very deep recession in Europe compared to the US,” said Matthrew.

“As those worries have unwound, European banks have done particularly well.”

Structural changes

Right now, European economies are still weak.

Whenever economic activity slows, bank stocks are challenging targets to hit due to banks’ earnings ties to borrowers’ ability to repay loans and satisfy consumers’ and businesses’ appetite for more credit.

However, unlike in 2008, banks are better positioned to endure loan defaults.

Following the global financial crisis, regulators proactively set up measures, requiring lenders to have a sizable capital cushion against future losses.

Lenders must also have enough cash (or assets that can be quickly converted) to repay depositors and other creditors.

Luc Plouvier, a senior portfolio manager at Dutch wealth management firm Van Lanschot Kempen, noted that banks underwent structural changes in the past decade.

“A lot of the regulation that’s been put in place [has] forced these banks to be more liquid, to have much more [of a] capital buffer, to take less risk,” he noted.

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