Inflation and recession: what impact on cryptos? Inflation reached record highs in the Eurozone. Predictions suggest that the latter will soon exceed 10%. So what are the consequences for the economy in general and the crypto market?
Inflation continues to rise
For many months, inflation has been rising and prices are soaring , especially on the old Continent. This situation is leading more and more economists to predict a painful recession for the coming months.
Between rising prices and shrinking growth, the European Central Bank does not have much leeway. If, on the one hand, it puts stimulus measures in place again , as during the post-COVID period, inflation will pick up again . Conversely, a tightening of its policy and an increase in interest rates will certainly stem the rise in prices but also slow down growth.
Faced with this dilemma, the ECB, like the FED in the United States, has no choice but to slow down the economy to better limit inflation, which is reaching impressive levels. The next rate hike by the ECB should reach at least 50 basis points but more likely 75 basis points . Of two evils, the ECB therefore chooses recession rather than inflation.
In the euro zone, inflation reached 9.1% in August , year on year, against 8.9% for the month of July. Driven by energy prices and in particular gas, due to tensions with neighboring Russia, inflation is now moving into the services sector and non-energy industrial goods.
If we remove foodstuffs and fuel , inflation has just risen from 5.1% to 5.5%. One more bad news to manage for the European Central Bank. According to Christoph Weil, an economist at Commerzbank , this price spike is far from over:
"The inflation rate is likely to jump in September. Therefore, the pressure on the ECB to continue raising interest rates significantly should remain high."
A coming recession?
The ECB must curb inflation, in accordance with its role. But what are the consequences for the economy and growth?
Recession seems inevitable to many observers. The recent rise in energy prices is forcing households in particular to postpone spending to pay their gas or electricity bill. This increase in energy traffic will also have a strong impact on companies, which will have to pass it on to their customers.
Even if the European Union has mentioned the possibility of capping energy prices , nothing is certain in this area. Moreover, there is no guarantee that this scenario will be enough to avoid a recession. Recently governments, including that of Austria, said they were in favor of this cap to put an end to “ the explosion of prices”.
For Riccardo Marcelli Fabiani, of Oxford Economics, one of the leaders in forecasting and economic analysis, the vicious circle that we usually know will then take place:
"Higher inflation will weigh more on demand, leading to slower growth and pushing the Eurozone into recession this winter."
Another indicator to watch is the labor shortage . The euro zone is experiencing a severe labor shortage which is pushing certain sectors to have to raise wages . This increase also weighs on companies which could be forced to increase their prices and thus promote inflation.
What consequences for the crypto market?
Traditional markets have suffered a blow since the start of the year. The CAC 40 has fallen by almost 15% since January and the S&P 500 by almost 17% over the same period. Despite everything, the markets are still far from the levels of the Covid crash reached in March 2020. They have even experienced rather positive recent weeks. However, some analysts point to the risk of a “bear market rally ”, a short-lived rise in a long-term bear market.
A recession would have a strong impact on the stock market . Hard to imagine that the crypto market can get away with it. If the correlation between the two markets seems slightly less strong than a few months ago, a fall in traditional markets would take the crypto sector in its wake.
In a context of economic recession, the time will no longer be for risky assets but for capital protection . Large investment funds and traditional finance players are already calling to flee the crypto market like JP Morgan recently . While the bank also makes a value judgment on the quality of industry projects, the substance of its thinking seems to have consensus in the economic world.
If a severe stall in the economy occurs, it will not do well to be over-invested in cryptocurrencies. For now, the bear market that we know on crypto is certainly violent, but it could well be that we are only at the beginning!
0 Comments