Good news in perspective in Europe

As spring approaches, we expect European consumer confidence to improve and spending to stimulate the economy.

  • Central bank meetings, crucial data releases and earnings updates mean this is shaping up to be an important week in financial markets.
  • In Europe, we have seen gas prices return in the short term to their pre-Ukrainian conflict levels, and they could fall further. This bodes well for inflation and growth.
  • We are seeing a similar trend in the UK, but consumers are overwhelmed by rising mortgage rates.

This is an important week for the markets. The three major central banks meet, we receive crucial economic data and no less than 143 S&P 500 companies will publish their results. The financial context could be very different next week at the same time.

But I would like to look a little further and suggest that European economies, including the UK’s, could do much better in the spring and summer.

It’s all about natural gas prices. Although the terrible conflict in Ukraine continues, the forces of supply and demand, combined with favorable weather, have led to a sharp drop in natural gas prices in Europe. Futures prices for short-term deliveries have fallen back to pre-war levels and even next winter’s prices have fallen considerably since last fall’s peak. It is reasonable to think that gas prices could fall further, which means lower inflation and better growth.

In the UK, the price cap set by the government, currently at 2,500 pounds, is due to rise to 3,000 pounds in April. Chancellor Jeremy Hunt is expected to announce he is waiving the raise. But the big news is that the £2,500 cap may not be clear in the second half of the year and actual prices could be closer to £2,000 per household. A similar pattern seems likely in Europe, although each country has different support systems.

There is also the important and obvious fact that warmer weather and longer days mean that the volume of energy consumption will decrease. As a result, hard-hit European consumers will get a boost. As their confidence improves, they are likely to start tapping into their “covid piggy bank”. Unlike their American cousins, European consumers have felt too nervous to spend their savings, but that could change.

I don’t want to overstate the improvement. There are still big problems in Europe and the UK is facing the brunt of rising mortgage rates. But given the prevailing pessimism and the weak data likely to be published regarding winter, it is worth clinging to the prospect of a brighter spring and summer.

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