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Steno Signals #63: STAGFLATION in Europe and payroll recession in the US?

Sticky inflation, renewed issues with high energy costs and a light recession in the making already. Europe screams stagflation and even the ECB admits to it. Meanwhile, we are edging closer to the actual payroll recession in the US.
2023-09-03

Happy Sunday and welcome to our flagship editorial.

Stagflation is on the cards in Europe and even the ECB agrees to it. What a way to open this weekly editorial on everything macro of relevance for your portfolio.

Several countries are already either stagnating or outright declining in real growth terms in Europe in the official Q2 numbers and yet inflation is running at levels not seen before through the lifetime of the single currency. If it walks like a stagflation, talks like a stagflation and quacks like a stagflation, it probably is a stagflation.

Even the ECB now admits to it being an issue as the influential member of the committee Isabel Schnabel addressed the media on Thursday with a message that the ECB is negatively surprised on growth, while inflation remains stickier than projected. That is as far as you can go as a member of the committee in admitting to a semi-stagflationary environment in the Eurozone. The question is now whether you hike into a stagflationary environment? Probably not

And what is worse is that Germany, and other core nations of the currency zone, is not rebounding despite green shoots seen elsewhere around the world. The orders to inventory ratios for most of the heavy industries in Germany keep weakening, which is in sharp contrast to the early signs of a cyclical rebound seen in the US.

Chart 1: The auto-industry is being demolished in Germany and it is still getting worse

Sticky inflation, renewed issues with high energy costs and a light recession in the making already. Europe screams stagflation and even the ECB admits to it. Meanwhile, we are edging closer to the actual payroll recession in the US.
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