Gas - the sword of Damocles for the economy
"The threat of a gas shortage is currently hanging over all economic forecasts like a sword of Damocles," says Dr Volker Schmidt, Senior Portfolio Manager at Ethenea Independent Investors S.A. He explains the impact of the gas throttling on the economy, how inflation and interest rates will develop and whether a recession is imminent.
Growth forecasts on shaky ground
The Eurozone, as a major importer of gas, has certainly been particularly negatively affected by the shortage and the price escalation. It is therefore very surprising that the IMF's recent forecast, published at the end of July, sees growth in the Eurozone slightly higher than in the USA in both 2022 and 2023. However, the forecast in the eurozone is certainly on shakier ground. The risk of a delivery suspension from Russia is omnipresent. "That is why we at Ethenea prefer the US dollar to the euro - even still at a level close to parity. The latest political crisis in Italy also plays an important role in our considerations," emphasises Dr. Volker Schmidt.
Lately, the word recession has been mentioned more often when referring to the economic development, says Dr. Schmidt. This is all the more astonishing given that the US economy recently created more than 400,000 new jobs per month. He says the situation is similar in the Eurozone. "Even if the US economy were to fall into a technical recession, with two quarters in a row of negative growth, we still expect a robust labour market in 2023. A hard landing with an unemployment rate of over 5 per cent could only follow in 2024. But this is hardly relevant for the financial markets at the moment," explains Dr Volker Schmidt.
Gas price drives up inflation
The portfolio manager explains that another important aspect for investors is the influence of the gas price on inflation: "Here, too, the Eurozone and the USA are not far apart with inflation rates that are currently around 9 percent. The dramatic increase of the inflation rate started earlier in the US and has now become much more widespread. In contrast, the increase in the Eurozone has started later and is very much due to high energy prices." The IMF predicts a faster slowdown in the US with inflation at 3 per cent in 2023, whereas the eurozone should still be at 3.9 per cent, he said. "The yield curves for US Treasuries and German government bonds reflect this to some extent. The US curve is already clearly inverted with 2-year yields well above 10-year yields, whereas the German yield curve continues to have a classic upward shape," Dr Schmidt said.
In view of the already advanced inflation, the US Federal Reserve is already further along with its interest rate hikes, according to Dr. Volker Schmidt. Interest rate cuts are not expected until the end of 2023. In contrast, the ECB has only just started raising interest rates. "If the IMF forecast is confirmed and gas deliveries from Russia remain relatively stable, then the ECB would only think about interest rate cuts again after the Fed. That is why yields on 10-year Bunds of less than 1 per cent are clearly too low in our view. Investors who, like us, do not yet believe in a significant recession in the Eurozone should keep an eye on the price development of 10-year Bunds, because prices could fall again and yields could rise," says the portfolio manager.
Bail-out for energy companies
"Already in spring we pointed out that an investment in energy companies bears high risks. Eventually, Électricité de France (EDF) might be nationalised and Uniper might be rescued by the German government, so that bond and promissory note creditors will get their money back, but our caution was certainly correct," says Dr Schmidt. For EDF shareholders, the nationalisation means that they will get another attractive price for their investment, whereas Uniper shareholders will have to digest a high loss.
