Outlook

European gas prices remain historically elevated, but have fallen to an 18-month low, and storage levels are tracking well above seasonal averages after a concerted push to lower usage and diversify supply relationships beyond Russia. Although Germany’s decision to phase out nuclear reactors has left the bloc’s largest economy vulnerable to volatility in global fossil fuel prices, new liquified natural gas terminals and storage facilities should limit the likelihood of another energy shock in the winter months. This should reduce pressure on headline inflation, lessen the need for another round of aggressive monetary tightening, and improve underlying consumer confidence levels...

The European Central Bank’s economic projections look increasingly over-optimistic, with a vast array of indicators pointing to a potential double-dip downturn in the common currency area by the end of the year. Support to growth from lower energy prices has faded, housing prices are negative or falling in most core economies, corporate insolvencies are creeping higher as earnings weaken, and S&P’s euro area composite purchasing manager index slipped back into contractionary territory in June. Further weakness beckons: Exports to both of the euro area’s largest markets – China and the United States – are looking vulnerable as the global manufacturing...