Eurozone economic outlook

■ As natural gas prices continue to rise, it is likely that interest rates will continue to rise significantly.

 In the eurozone, economic volatility has become evident due to gas shortages and soaring prices. Business and household conditions have deteriorated further since July, especially on the domestic demand side, and we have started to observe a decline in real economic activity.

 Economic activity was mixed, with logistics normalizing and production recovery intensifying in China, with June industrial production (+0.7% month-on-month) hitting its highest level since the COVID-19 crisis.

 In contrast, retail sales (down 1.2% year-on-year) fell to the lowest level since April 2021, indicating a slowdown in personal consumption due to soaring prices. The situation for businesses, households, and investors has worsened since the Russian invasion of Ukraine in July. The August PMI (preliminary data, manufacturing: 49.7, services: 50.2) declined in both manufacturing and services. The Business Confidence Index (97.6), Consumer Confidence Index (-24.9), Sentix Investor Confidence Index (-25.2), Germany (Germany) ZEW Economic Expectation Index (-55.3), as calculated by the European Commission, experienced sharp declines in July. As raw material and fuel prices continue to rise, concerns over natural gas purchases, heat waves, and drought spread, suggesting economic activity such as production and household consumption is shrinking.

 In addition, the rise in energy prices has not stopped, and the pace of increase in the consumer price index (HICP, up 8.9% year-on-year) in July continued to accelerate. In the United States, where gasoline prices have stopped rising, the rapid rise in energy prices has begun to stop. In Europe, where gas prices continue to rise, inflation is likely to come later than in the United States. The European Central Bank (ECB) raised its policy rate by 0.50% on July 21 and plans to continue raising rates after September. While the rate hikes determine based on data, the continued rise in natural gas prices increases the probability of continued substantial rate hikes.