The summer doldrums: interest rates are going nowhere for now
A heat wave is keeping Europe in its grips and this will have more economic impact than people are realising, including on interest rates. The scorching heat leads to lethargic state of the economy. Except for maybe ice cream and Air-cooling sellers, most other business seems to be suffering. It was just announced that Business orders in Germany are already down a whopping 4 percent in June. July may well be worse.
The heat saps the energy. We see it in the office in Berlin, and in construction projects both in Germany and Holland, and you can observe it all over Europe. Productivity will be down, consumption will be down, whilst prices of foodstuffs will be up.
What is the impact of these summer doldrums on interest rates?
In my previous contribution I highlighted that rates are hovering at a one year low, and I did not expect many changes soon. The main reason for the low rates is all the talk about trade wars, that together with Italian and Brexit troubles, has sapped business confidence.
To many people’s surprise, interest rates staged a small rally (about 0.2%) over the last two weeks, but it is already petering out and half that increase has evaporated.
What drove this mini rally?
After disappointing news in the spring, economic indicators were looking up again. Companies also reported record profits over the second quarter, with Apple hitting the trillion dollar stock value benchmark among others.
But it looks like this rally has already petered out, and reality is sinking in. In Europe the scorching heat is quite a reality check and will start feeding into disappointing economic data. In the US the focus is turning again on Trump and the November elections are around the corner. The whole of Congress and half of the Senate are reelected. Trump’s republicans are expected to lose their majority. This will create quite a policy impasse, and will just risk to heighten the vitriol that comes from the White House, including some of his favorite targets trade with China, Germany and the EU.
This is not the environment in which business or consumers will go on a spending binge, and drive up interest rates… So for now it seems we are in the doldrums. Little changes in interest rates. Like the old sailing vessels that were stuck in areas without a sigh of wind. At least a little rain is expected in Europe but don’t expect major upheavals.
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