A steel worker at the blast furnace tap of the Salzgitter AG steelworks on March 2, 2020 in Salzgitter, Germany.
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Europe appears headed for recession as its biggest economies, Germany and France, face political and economic woes at home.
Business activity in the manufacturing and services sectors in both countries — Europe’s largest and second-largest economies, respectively — fell more than expected in September, data showed on Monday.
In Germany, the HCOB flash composite purchasing managers’ index (PMI), which measures business activity in both sectors, fell from 48.4 in August to 47.2 in September, a seven-month low and below expectations of 48.2 .
In France, meanwhile, the composite PMI hit an eight-month low of 47.4 in September, down from 53.1 in August and below expectations of 50.6. A reading above 50 indicates expansion, while a reading below indicates contraction.
For the euro zone as a whole, S&P Global, which compiles the data, said business activity in the single currency zone fell in September for the first time in seven months, falling to 48.9 in September from 51 a month earlier.
The Olympics gave a boost to France’s economy in August 2024.
Olympia De Maismont | Afp | Getty Images
The PMI data – a cautious gauge of economic activity in the region – is the latest to point to a sharp slowdown in Europe’s traditional drivers of growth, with Germany and France grappling with political turmoil and economic uncertainty at home.
“The big fall in the Eurozone Composite PMI suggests the economy is slowing sharply, Germany is in recession and the boost from the Olympics in France was just a blindside,” Andrew Kenningham, chief economist for Europe, said in an analysis on Monday in Capital Economics.
“With France’s new minority government now planning to significantly tighten fiscal policy, the outlook for growth in France looks increasingly poor,” Kenningham noted, while for Germany, he said “surveys also show that Germany falls deeper into recession.”
“Sick man” of Europe
Germany’s recession is not new, with the country’s once booming export economy flirting with recession for well over a year now. Ahead of the latest PMI data, economists had expected Germany to grow just 0.3% in 2024. according to the Bundesbank; the The spring forecasts of the European Commission was even more pessimistic, predicting growth of just 0.1% this year.
The country’s latest PMI data shows that “a technical recession appears to be brewing,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank (HCOB), said in an analysis on Monday. It expects German GDP for the current quarter to fall by 0.2% compared to the previous quarter.
“In the second quarter, GDP already contracted at a rate of 0.1%. There is still some hope that the fourth quarter will be better as higher wages combined with lower inflation will boost not only real income but also consumption, supporting domestic demand,” it added.
A consumer chooses vegetables at a supermarket on March 12, 2024 in Berlin, Germany.
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Once Europe’s poster child for growth, Germany is now likened by economists to the “sick man” of Europe.
“The German economy continues to struggle for momentum, fueling concern that the headwinds are structural and not just cyclical,” JP Morgan eurozone economist Greg Fuzzi said in a note on Friday, titled “Check for the German Patient ».
“It is certainly easy to list many challenges: growth and competition in China, higher energy prices, green transition, transformation in the automotive sector, aging population and delays in public infrastructure investment,” he said, noting that there is also a perceived weakness of the tripartite government coalition to face these challenges, “which weighs on trust”.
French political woes
In France, after months of political uncertainty following inconclusive early elections earlier this year, a government under new Prime Minister Michel Barnier has just been formed.
The veteran Tory and former Brexit negotiator has inherited something of a poisoned chalice, however, with the country facing acute fiscal challenges that require immediate attention.
France’s newly appointed Prime Minister Michel Barnier arrives for the handover ceremony with outgoing Prime Minister Gabriel Attal at Hotel Matignon in Paris, France, September 5, 2024.
Sarah Meyssonnier | Reuters
Analysts, including David Roche, chairman of Quantum Strategy, believe the Barnier-led government is unlikely to last more than a year, putting much-needed economic and fiscal reforms on the back burner.
“This will cause France’s budget deficit and debt to worsen. France will defy the EU on the Excessive Deficit Procedure. Political paralysis now has both France and Germany at their throats,” Roche said.
“The RN & FP will wait for the one-year anniversary of the general election – the earliest date new general elections can legally be held – before dropping Barnier’s hodgepodge.”
He added that no reforms will be made during this time. “Stay short French government bonds even if patience is needed,” advises Roche.
German Chancellor Olaf Scholz and French President Emmanuel Macron address the media during a press conference at Schloss Meseberg on May 28, 2024 in Gransee, Germany.
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The far right is also a threat in Germany, with the Alternative for Germany party performing well in recent state elections as immigration, integration and the economic downturn become focal points of public discontent.
Chancellor Olaf Solz’s center-left Social Democratic Party (SPD) narrowly stayed in power in his home state of Brandenburg in regional elections this weekend, precisely to keep the AfD at bay.
A defeat for the AfD could have major implications for Germany’s leadership, given the far-right’s surge in popularity among sections of the German electorate. The far-right party won its first state election in Thuringia earlier this month and came a close second in Saxony in a separate vote.
Ian Bremer, founder and chairman of consultancy Eurasia Group, commented earlier this month that the center had “collapsed in the two largest economies of the European Union”.
“In France, the far left and far right fared better in snap parliamentary elections called by President Emmanuel Macron… but are now cut off from the shaky minority government led by centre-right Michel Barnier, meaning their constituencies are angrier , while leaders take no responsibility for their way out of trouble The deal keeps Macron in power for now, but only makes the extremists stronger in the upcoming elections,” he noted in emailed comments.
Marine Le Pen and Jordan Bardella at the final rally before the June 9 European Parliament elections held at Le Dôme de Paris – Palais des Sports on June 2, 2024.
Nurphoto | Nurphoto | Getty Images
Similar political developments are taking place in Germany, Bremer said, with political victories for the AdD and the issues that have fueled the party’s rise — including strong anti-immigrant sentiment, economic populism and opposition to support for Ukraine — that Bremer predicts will it will only continue to grow in popularity.
“The political reserve remains a strong European Union with largely continuous leadership — and so there are no longer growing attempts to exit… but domestic policies are turning against the establishment, [and are] part of a broader fragmented globalization trend,” Bremer said, adding that “there’s a lot to watch here.”
