Tailwinds fading, headwinds building

With some important exceptions, including the German manufacturing sector, economic activity seems to have held up a little better than we had feared so far in Q2. We don’t think this will last. The recent strength has been helped by the re-opening of high-contact services including hospitality and travel which already seems to be fading. What’s more, the manufacturing sector is still meeting the backlog of unfulfilled orders whereas new orders have slumped over the past couple of months. With both the headline and core inflation rates at record highs in May, the ECB is set to raise interest rates significantly in the second half of the year. That is leading to higher borrowing costs for households which are already struggling with the cost-of-living crisis driven by higher energy and food prices.