Actually, it all started with the pandemic. A virus sent millions of people into lockdown, ploughing through economies and crumbling supply chains. Economies kept shrinking, people suffering. But thanks in part to the reactions by states and central banks, the pandemic’s consequences were cushioned. The pandemic finally lost its horror, the economy was able to recover. This approach required a lot of money that was usually granted as loans, created by central banks and widely distributed. Money was cheap, interest rates remained at or even below zero.

“The steps that were taken to combat the pandemic acted as a trigger for the current problems and fears in the economy overall and in the markets”, Gerlinger pointed out. “It is above all the European Central Bank’s belated change of course that is now causing further distortions.” The US Fed, on the other hand, had made it clear fairly early on that it intended to vigorously fight inflation. The ECB, however, waited, thus possibly missing the optimum moment and acting with the handbrake on. “Inflation is therefore likely to rise even more now – and, in addition, the euro will come under pressure”, Gerlinger added.

As far as the collective European self-esteem is concerned, it is difficult per se to see the euro on the same level as the dollar. On the other side of the coin, the weak euro makes European goods cheaper abroad, which may boost exports. “But we also continue to import inflation by way of higher prices for imports”, Gerlinger cautioned. “And this is true for private households and for businesses.”

Yet, businesses have remained unaffected so far. Many companies even reported record profits, frequently because they were able to collect scarcity premiums. In terms of operating profits, spring 2022 was the second best quarter ever among the 40 Dax corporations. But there are differentiations: While energy company RWE reported billion-euro profits, energy company Uniper had to be rescued by the state. And businesses may yet run into trouble: inflation and a lack of reserves are weighing on customers’ purchasing mood which could lead to declining sales.

Another myth has also been debunked: for a long time, economists expected that people simply were unable to spend their money in times of the pandemic, were therefore resting on high reserves and now wanted to use them for consumption. But statistics paint a different picture: neither was consumption held back to any major extent, nor are there particularly large reserves left. “And if there are any excess funds, they will mainly be used up for the next heating bill”, said Gerlinger.

In addition, the era of the 9-euro ticket is coming to an end in Germany so that those who are travelling by train will have to pay more. A gas levy is being introduced also so that in view of the continued high energy prices and the beginning of the heating season, this will cause a further price increase. This, in turn, will be used as a basic argument in tariff negotiations and lead to renewed price increases. “Inflation is far from being defeated, in fact we will see even higher levels”, Gerlinger explained.

It is therefore likely that the current uncertainty is set to continue, putting yet another damper on markets. “Fundamentally, however, many scenarios that are weighing down sentiment and the real economy are already priced in”, said Gerlinger. “So the next upswing may come even faster than expected.”

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