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It was the turn of the ECB to announce on interest rates this week and they made their intentions clear. They raised interest rates by an unprecedented 0.75%, in line with expectations, taking the main refinancing rate to 1.25%. Hawkish comments which followed also suggest that this will not be the last hike which we see. In a statement released after the move, it said that it expects to “raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.” They were also quoted as saying that “this major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium term target.”

This move and comments come despite concerns surrounding economic growth and perhaps highlights the difficult position which the ECB, and other central banks around the world, find themselves in. Growth is clearly slowing, with the ECB themselves bringing down next year’s forecast to 0.9%. This week also saw the release of the S&P Global Composite PMI for the region which came out at 48.9 for August, with a figure below 50 representing contraction.

Figures weren’t much better for the UK, with the S&P Global/CIPS Composite figure coming in at 49.6 for August, below the 52.1 recorded last time round and below the consensus forecast of 50.9. The figure was dragged down by a sharp fall in manufacturing activity and a slower rate of service sector expansion. The announcement this week that the government is to cap the consumers household gas and electric cost at £2,500 may provide some support to consumer spending. But even after applying this cap the average household is likely to have a much higher energy bill come the lifting of prices in October compared to presently. Yet, after the move by the ECB yesterday, there will undoubtedly be increased pressure for the Bank of England to follow suit when they meet next week.

In the US however the picture was muddied this week by mixed data. The S&P Global Services PMI for August came out at 43.7, therefore suggesting contraction. The ISM Non-Manufacturing PMI meanwhile came out at 56.9 for the same period, therefore suggesting expansion. A question therefore of which to believe, the devil will be in the detail.

Analysis of the Swedish economy by Macrobond/Nordea perhaps highlights an issue which they and other economies will need to face head on. In the past there has been a close relationship between consumer confidence and changes in total inventories, falling and rising in tandem. During 2022 we have seen consumer confidence in the country, as we have in many others, take a sharp turn to the downside. Changes in inventories meanwhile has continued to rise sharply, outside of the norm. Either we are due a sharp pick-up in consumer confidence, which unfortunately doesn’t look likely at present, or companies are stuck holding a higher level of raw materials and/or finished goods. During COVID we had a large supply/demand imbalance, with demand outstripping supply by some margin. Are we now moving into a period where the reverse is true?

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