Daily Update: A Soft Landing for Europe, But Concerns Remain

Today is Thursday, May 2, 2024, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global.?Subscribe?to be notified of each new?Daily?Update.?

Why does a good economy feel so bad? It’s a question to bedevil officials at the European Central Bank (ECB), who must be congratulating themselves for managing a soft landing from an inflationary spike. Policymakers have been struggling with the threat of war, rising energy costs and the aftermath of a pandemic. A cycle of monetary tightening appears to be concluding with inflation within a hair’s breadth of targets and close to full employment. By any measure, this is a successful ending to an almost-crisis. But European productivity numbers are worryingly low. Are these concerning productivity numbers the new secular trend or simply the residue of pandemic, inflation and war?

Compared with some other developed markets, European GDP growth is projected to be anemic for the next few years. ECB economists anticipate growth of 0.1% in 2024 and 1.2% in 2025. Certainly, slow growth is preferable to no growth or even the recession many observers predicted for Europe a few months ago.?

S&P Global Ratings anticipates three different rate cuts of 25 basis points in the second half of 2024, according to the most recent Credit Conditions report. Persistent geopolitical tensions on the boundaries of Europe and creeping protectionism represent downside risks to European economies. Many businesses will continue to face higher financing costs despite anticipated rate cuts, but overall credit quality is stabilizing. As always, the areas of greatest vulnerability lie at the speculative end of the credit spectrum.

While the economic news is good, there’s usually a caveat. For Europe, this lies in the productivity numbers. The multidecade trend of productivity in Europe has been positive. However, during the COVID-19 pandemic, productivity fell, particularly in some of Europe’s biggest economies, such as the Netherlands, France, Germany and Italy. Not only isn’t productivity on a path to recovery, but it appears to be declining further in sectors including construction, transportation, retail and wholesale services, financial services, and public services.

Often, productivity falls off due to lower investment. But European business investments have been historically high relative to GDP. The optimistic take is that productivity statistics are simply taking a while to recover from multiple economic and geopolitical shocks. The pessimistic take is that European economies have undergone a structural shift.

Europe’s population is also aging. According to S&P Global’s Chief EMEA Economist Sylvain Broyer, the average age of Mittelstand entrepreneurs increased to 53 in 2022, from 45 in 2002, and 36% of the oldest entrepreneurs are planning investments, compared with 57% of the youngest. While labor demand remains strong in Europe, it is particularly strong in the service sector, which tends to have lower productivity growth rates. An aging population working in more service jobs could account for lower productivity numbers. On the positive side, some people believe that AI could become a productivity accelerator over the next few years. Undoubtedly, ECB officials would appreciate some secular tailwinds.

Today is Thursday, May 2, 2024, and here is today’s essential intelligence.

- Written by Nathan Hunt.

Economy

How Are Some Dividend Growers Outpacing Inflation and the Benchmark?

With the 10-year US Treasury yield hovering around 4.5%, investors may be able to find attractive yields without taking on too much risk. The challenge, however, is maintaining purchasing power relative to inflation (USD 1,000 in December 1999 was only worth USD 538 as of March 2024). For those seeking income and total returns that have historically kept pace with or exceeded inflation, high quality dividend strategies may be appealing.

—Read the article from S&P Dow Jones Indices

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Capital Markets

Japan Private-Sector RMBS Performance Watch: Rate Hike Has Limited Impact

Underlying asset performance of Japanese private-sector residential mortgage-backed securities (RMBS) transactions should remain stable. S&P Global Ratings' economic forecast as of March 2024 is for a gradual rise in interest rates to 1.0% through 2027 as the Bank of Japan (BOJ) normalizes its interest rate policy. However, it believes a rise in interest rates will have limited impact because most remaining transactions in the index pool are backed by fixed-rate loans. It forecasts the pace of inflation in Japan will fall gradually by 2027. Therefore, S&P Global Ratings thinks it is unlikely to hurt the performance of underlying mortgage assets.

—Read the article from S&P Global Ratings

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Global Trade

Greece Imports No LNG In April For First Time In Five Years

Greece has imported no LNG in April for the first time in five years, as gas prices in the region have made LNG uneconomical. The country has imported anywhere between 34,000 mt and 336,000 mt of LNG per month in the past five years, according to S&P Global Commodity Insights data. Greece imported 67,000 mt in April 2021 to 103,000 mt in Aril 2022 and 157,000 mt in April 2023.

—Read the article from S&P Global Commodity Insights

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Sustainability

Listen: Women In Leadership: How Sappe CEO Went From Investment Banker To Running A Global Consumer Brand

As part of our ongoing “Women in Leadership” series of the ESG Insider podcast, we’re speaking with women CEOs and leaders from across industries and around the world to understand their path to the top. In today’s episode, we talk with Piyajit Ruckariyapong, CEO of Thailand-based Sappe, a family business producing a range of juice and health drinks sold around the world.

—Listen and subscribe to the podcast from S&P Global Sustainable1

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Energy & Commodities

Dubai Approves $35 Billion New Airport Five Times Bigger Than DXB

Dubai on April 28 approved the construction of a new, $35 billion airport, five times bigger than the existing Dubai International Airport, or DXB, in a move set to create a new center for jet fuel demand with ENOC Group ready with a new pipeline. The Al Maktoum International Airport spread over 70 km will have five passenger terminals housing 400 aircraft gates for 260 million travelers, Dubai ruler Sheikh Mohammed bin Rashid said on X, formerly Twitter. Annual cargo capacity will be 12 million mt/year. It will replace DXB within 10 years, the ruler said.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Listen: Data Demand: US Power Sector Responds To AI-Driven Growth

Power-hungry datacenters require access to reliable electricity to meet the increasingly digital needs of modern society. As society processes more data, more datacenters are being built, and more electricity is needed. Dan Thompson and Adam Wilson join EnergyCents with hosts Hill Vaden and Sam Humphreys to discuss the impact of datacenters on the US power market, and how grid operators are responding to calls for load growth after more than a decade of flat demand.

—Listen and subscribe to the podcast from S&P Global Commodity Insights

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