Some good news ahead for the UK and Europe

This is a huge week for markets. The big three central banks are meeting, we get crucial economic data published and no less than 143 companies in the S&P 500 will report their earnings. The financial background could look very different this time next week.

But I want to look a little further ahead and suggest that the European economies, including the beleaguered UK, could look quite a bit healthier in the spring and summer.

It all comes down to natural gas prices. Although the terrible conflict in Ukraine continues, the forces of supply and demand, coupled with favourable weather have led to a big fall in natural gas prices in Europe. Futures prices for near term delivery have fallen back to pre-war levels and even those for next winter have declined significantly since the peak last Autumn. It’s a reasonable assumption that gas prices could fall further and that means lower inflation and better growth.

In the UK, the government’s price cap, currently £2,500 is due to rise to £3,000 in April. As we reported last week, Chancellor Jeremy Hunt is likely to announce that he is scrapping the increase. But the really big news is that the even £2,500 cap might not be binding in the second half of the year and actual prices could be closer to £2,000 per household. A similar profile looks likely in Europe, though every country has different systems of support.

There is also the important and obvious fact that warmer weather and longer days mean that the volume of energy usage will fall. The result is that Europe’s hard-pressed consumers will get a boost. As their confidence improves, it is likely that they will begin to draw down their ‘covid piggy banks’. In contrast to their US cousins, Europe’s consumers have felt too nervous to spend their savings but that could change.

I don’t want to overstate the improvement. There are still big problems in Europe and the UK has to cope with the burden of increased mortgage rates.

But given the prevailing pessimism and weak data likely to be released relating to the winter, it’s worth holding onto to the prospect of a brighter spring and summer.