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SPI Management Newsletter 09.06.23

Eurozone Enters Recession as Inflation Hits Consumption

The Eurozone has sunk into a recession, with Germany's economy struggling, indicating a more profound impact of the Ukraine conflict than initially anticipated. In contrast to the expanding US economy, Europe is lagging due to persistent inflation, which is suppressing consumption. The Eurozone's economy is currently only 2.2% larger than before the Covid-19 pandemic, compared to a 5.4% growth in the US.

Germany's economic weakness is particularly worrying, as past quick recoveries were driven by its strong exporters. However, these sectors have been hit by the pandemic and geopolitical tensions. Meanwhile, the ongoing conflict in Ukraine adds to the uncertainty. Despite growth in other large economies like France, Italy, and Spain, the recession in the Eurozone is largely due to Germany's struggling economy.

Economists predict a slow recovery throughout the year, hampered by rising borrowing costs from the European Central Bank's anti-inflation measures. The Eurozone's economy shrunk by 0.4% annually in Q1, with weak performances from Germany, Ireland, and Finland contributing to this recession.

The expectation is that growth will resume in Q2 as energy costs decrease, although the recovery is likely to be slow. The OECD predicts the Eurozone economy will grow by only 0.9% this year, compared to 1.8% for the US. The main divergence between the Eurozone and the US is consumer spending, with Europeans cutting back on spending due to uncertainties linked to the Ukraine conflict. High food prices in Europe, in comparison to the US, are also impacting spending.

The European Central Bank's successive rate increases since July last year are expected to further impact growth in the coming months. Furthermore, Ireland's economy, once the fastest-growing in the Eurozone, saw a significant drop in factory output in March, which contributed to the recession. On the bright side, a rebound of 70.7% in April suggests this downturn is temporary.

World Bank Optimistic for 2023 Global Growth, Lowers 2024 Outlook

The World Bank has revised its 2023 global economic growth forecast upwards, attributing the increase to the resilience of U.S. consumer spending and China's quicker-than-predicted economic reopening. However, the bank has downgraded its growth prediction for 2024, with concerns about high inflation and interest rate hikes, particularly in developing countries. The global economy is expected to grow by 2.1% in 2023, a slight increase from the 1.7% predicted in January, but a slowdown from last year's 3.1% expansion. For 2024, the forecasted growth rate is 2.4%, a drop from the 2.7% estimated earlier. Rapid interest rate increases in the U.S. have particularly impacted developing nations, increasing their risk of financial crises and impeding investment and growth. The World Bank highlights that some of the poorest countries are in an especially vulnerable position due to their escalating debt and the rising costs of servicing it.

Binance Suspends Dollar Deposits Amid Regulatory Scrutiny

Following a lawsuit by US regulators, Binance.US, the American arm of the world's largest crypto exchange, has announced the suspension of US dollar deposits. The company is also preparing to pause fiat dollar withdrawal channels by June 13th, as part of its transition towards a crypto-only exchange. While crypto operations, including trading, staking, deposits, and withdrawals, will remain fully functional, this move marks a dramatic intensification of regulatory action against the crypto industry, following the SEC's recent lawsuits against Binance, its CEO Changpeng Zhao, and Coinbase. Despite the turbulence, cryptocurrency prices remained relatively stable, with a muted market reaction to the news. Binance.US described the SEC's stance as "extremely aggressive and intimidating," pledging to continue to defend its operations, customers, and the industry against what it termed "meritless attacks of the SEC."

The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit on Monday against Binance, the world's leading cryptocurrency exchange, and its CEO Changpeng Zhao, alleging deceptive operations. These actions may fundamentally alter the cryptocurrency market, as they challenge the industry's long-standing argument that tokens are not securities and thus should not fall under SEC regulation.

Adapted from WSJ, FT, NYT, Reuters, Al Jazeera

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