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Business climate indicators in the eurozone weakened significantly in June. In the manufacturing sector, this is due to the persistent constraints on production, with no hope of an easing in the foreseeable future given the war in Ukraine and the related energy crisis. In services, as expected, the post-Omicron reopening effect is wearing off. Current conditions are eroding moderately, particularly on the employment front, but the outlook for demand is declining sharply against a backdrop of inflationary pressures. To make matters worse, the ECB has triggered a severe tightening of financial conditions.
Since the outbreak of the war in Ukraine four months ago, the interpretation of European business confidence surveys has given rise to mixed sentiment. While there were signs of weakness -the opposite would have been surprising given the suddenness and severity of the shock- they were neither diffuse enough across sectors nor strong enough to signal a significant downturn. Moreover, as this war started when morale was well above normal, it left a safety buffer before hitting critical levels. There is no longer any ambiguity in the signals sent by eurozone businesses in June: they are all negative.
According to the flash estimates of the PMI surveys conducted from 13 to 21 June1, the downturn has become markedly more pronounced in all countries and sectors (table). In the manufacturing sector, purchasing managers' confidence fell for the fifth month in a row. In the services sector, which had previously found significant support in the catchup following the abating of the Omicron wave, it is the second consecutive contraction. In the eurozone, the business climate indices remain above the "critical threshold" for entering a recession (50 points) but all have fallen below their pre-Covid levels. This portends a slowdown in economic growth in the second half of 2022.
Moreover, given the state of EU-Russia relations, the disruption of supply-chains and inflationary tensions stoked by the war in Ukraine are not about to abate. Sanctions on the one hand, and reduced gas supplies on the other, all kindle fears of shortages. It is quite possible that European governments will have to ration energy distribution in the coming months, at least they are working on such contingency plans. In this extreme situation, there can be no doubt that this would cause a contraction of activity. Countries with a large industrial sector are most directly exposed. Germany is in the front line in this regard2.
Disclaimers for Distribution by ODDO BHF SCA to Non-United States Investors: This publication is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA (“ODDO”), which is licensed by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the Autorité des Marchés Financiers (“AMF”). This document, when distributed outside of the U.S., is intended exclusively for non-U.S. customers of ODDO and cannot be divulged to a third-party without prior written consent of ODDO. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been developed by our economists. It does not constitute a financial analysis and has not been developed in accordance with legal requirements designed to promote the independence of investment research. 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The statements, assumptions and forecasts contained in this document reflect the judgment of its author(s), unless otherwise specified, and do not reflect the judgment of any other person or of ODDO. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. This document is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor. Disclaimers for Distribution by ODDO BHF New York Corporation to United States Investors: Please refer to the most recent research reports on the subject companies for complete information and relevant disclosures. This document is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA ( “ODDO”). It is distributed to U.S. investors exclusively by ODDO BHF New York Corporation (“ONY”), MEMBER: FINRA/SIPC, and is intended exclusively for U.S. institutional customers of ONY and cannot be divulged to a thirdparty without prior written consent of ONY. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document is being furnished to you for informational purposes only and should not be relied upon as sufficient to form a basis for any investment decision. At the time of publication of this document, ODDO, and/or one of its subsidiaries may have investment banking and other business relationships with any of the companies in this report. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. However, ODDO has no obligation to update or amend any information contained in this publication. Past performance offers no guarantee as to future performance. All opinions expressed in the present document reflect the current context which is subject to change without notice. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of particular clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. This document is not a research report as defined in FINRA Rule 2241(a)(11) because the material in it is limited to one or more of the exclusions of the definition of research report in Rule 2241(a)(11)(A). This document is for institutional investors only. Consult your financial adviser or an investment professional if you are not sure you are an institutional investor. Disclosures Required by United States Laws and Regulations: Rule 15a-6 Disclosure: Under Rule 15a-6(a), any transactions conducted by ODDO, and/or one of its subsidiaries with U.S. persons in the securities described in this document must be effected through ONY. Contact Information of firm distributing investment recommendations to U.S. investors: ODDO BHF New York Corporation, MEMBER: FINRA/SIPC, is a wholly owned subsidiary of ODDO BHF SCA; Louis paul ROGER, President ([email protected]) 150 East 52nd Street New York, NY 10022 646-286-2137. Statement of conflict of interests of all companies mentioned in this document may be consulted on Oddo & Cie’s research site.
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