Exposure rates of the Dorval Asset Management Range – 22nd April 2022
This contrast makes for a challenging choice between the scenario of a moderate economic slowdown in Europe and the possibility of a bleaker outcome, particularly with uncertainty still surrounding the escalation of sanctions on Russia.
Consumer confidence in the euro area remains very sluggish (cf. chart 1) despite a very slight increase in April vs. March figures (from -18.7 to -16.9). The confidence index points to levels on a par with an economic recession, dented by the fast rising cost of living as a result of soaring prices for both energy and certain food items. However this analysis is overturned by the results of business surveys, at least for now, with the euro area composite PMI actually edging up to 55.8 in April, hitting a seven-month high.
Unprecedented gap between business and consumer confidence
Business climate and consumer confidence in the euro area
Composite PMI (RHS) / Consumer confidence (LHS)
Multiple factors can account for this unprecedented perception gap between the two surveys:
- The consumer confidence index is built in such a way that it suffers more from the rising cost of living, while overlooking job market momentum, which remains very buoyant.
- The services sector is a major provider of jobs (75% of euro area jobs) and is still enjoying a lift from the end of health restrictions in the tourism, airline and hotel-catering sectors. France – where the PMI stands at its highest since January 2018 – along with the Mediterranean countries particularly benefit from this momentum.
- Despite the dip in final consumption, very low inventories at production facilities, at wholesalers and retailers (cf. chart 2) mean inertia in orders to the manufacturing sector. There is a strong quest to rebuild inventories, which should help lift euro area GDP.
- Lastly, the other component of demand – investment – continues to be buoyed by public and private energy transition programs, among other factors.
Quest to rebuild inventories should buoy output in the euro area
Assessment of inventories, companies in the euro area
Assessment of inventories in retail / Assessment of inventories in manufacturing
The business climate in Europe could therefore continue to hold up well over the months ahead, at least in relative terms. However, the likelihood of this scenario will also hinge on the effects of sanctions related to the war in Ukraine and the corresponding financial measures taken to offset their effects. A sixth round of sanctions on Russia is in the offing, targeting first and foremost an embargo on the country’s oil. The effectiveness and the risks of this kind of move are obviously the subject of fierce debate in Europe and elsewhere. The US administration is beginning to worry about a fresh upturn in oil prices, which are currently kept in check by lower demand from China. Additionally, sanctions will need to be matched by steps to offset their effects – tax protection – by capping energy prices and offering subsidies to keep a lid on the cost of living and curb the risk of a recession. The ECB will pay particular attention to these aspects in determining the pace of its monetary policy normalization.
In our flexible funds, we maintain our moderate and highly diversified exposure to developed country equity markets, and pursue our investment in the energy transition theme.