The Eurozone Economy Contracts Again In August

The eurozone economy is slowing down. This is shown by the latest known data in the region, with a contraction in private activity in August for the second consecutive month . While industry is affected by the sharp increase in energy costs , services (with the greatest weight in gross domestic product or GDP) are stagnating as a result of the loss of purchasing power of consumers. A scenario that is nothing more than the prelude to a “difficult” second half of the year , experts warn.

Euro zone economic activity contracted in July for the first time since February 2021 . And the decline continues this month. That is what the preliminary readings of the PMIs teach , indices prepared by S&P Global , in which more than 50 implies expansion and less, contraction. They are one of the most reliable indicators to anticipate the behavior of the economy, since they are carried out through massive surveys of companies from different sectors.

In August, the composite PMI (which includes all private activity in the region) fell to 49.2 , its lowest level in 18 months , from 49.9 last month. However, the data has been better than anticipated by analysts (49).

” The economy is contracting in the third quarter of the year “, affirms Andrew Harker, economic director of S&P Global Market Intelligence, in the heat of the first data of this month.

“Cost of living pressures have wiped out the economic rebound in the services sector seen after the lifting of pandemic restrictions, while the manufacturing sector continued to be mired in contraction in August,” explains this expert.

The hardest setback for the industry since June 2020
Specifically, the preliminary manufacturing PMI sub-index for the eurozone has barely fallen (49.7 compared to 49.8 in July), but has also registered its worst mark in 26 months , that is, since June 2020 (when it was still noticeable the first shock from the pandemic).

European industry “continues to struggle under the weight of rising energy costs, persistent supply bottlenecks and ongoing labor shortages, ” says Rory Fennessy, an economist at Oxford Economics.

From S&P Global they highlight the record accumulation of stocks of finished products in factories: companies have not been able to sell the products due to the drop in demand. “This excess inventory suggests that there is little chance of improvement for manufacturing production in the short term,” Harker said.

“A decline in a wide range of sectors”
For its part, the flash services PMI stands at its lowest level in the last 17 months , at 50.2, showing the stagnation of the sector with the greatest weight in the euro zone economy.

” Cost of living pressures have wiped out the economic upturn” in the tertiary sector, says the economic director of S&P Global. “The tailwinds of [the recovery after] the covid are running out and inflation weighs even more on the purchasing power of consumers , “says Fennessy in the same sense.

“The economic weakness continues to become more and more generalized”

The prices paid by families in the euro zone rose again last month at an annual rate not seen so far , and the consumer price index (or CPI) can be expected to climb to new highs in August and in the months to come. The central bank of Germany (Bundesbank) has recently anticipated that inflation in the largest power in the region may be in double digits in the fall , a situation that already exists in 11 of the 19 countries in the euro zone .

Thus, there is “a decline in production and activity in a wide range of sectors, from the companies of basic materials and the automotive sector to the companies of the tourism sector and real estate activities, as the weakness economy continues to become more and more pervasive,” warns Andrew Harker.

The expert also highlights that the companies surveyed by S&P Global observe this month “a less intense increase in their costs “, which allows them to increase their sales prices at a slower rate. That could translate into some easing of inflation rates soon, but, Harker says, “it will come too late to provide substantial demand support.”

Along the same lines, Bert Colijn, an economist, questions “whether this can last now that natural gas prices are reaching new records ” as a result of geopolitical tensions between Europe and Russia over the war in Ukraine.

Thus, everything indicates that the remainder of 2022 will be a “difficult” period, as warned by the firm responsible for the PMI.

“A recession has begun in the eurozone”
Unlike other occasions, S&P Global has not offered this time an estimate on the rate of growth or fall in GDP in the eurozone so far this quarter. The gross domestic product expanded by 0.6% between April and June compared to the first three months of the year. But, as has already been said, the forecasts for the near future are not encouraging.

From Oxford Economics they anticipate that the euro zone economy will stagnate in the second half of 2022. Colijn goes further: “A recession has begun in the euro zone, since the reduction in purchasing power continues,” he says.

For a technical recession to occur, as has already happened in the United States , GDP has to contract in two consecutive quarters. This is a scenario that the European Central Bank (ECB) itself is already contemplating, although the monetary body does not expect, for now, that the potential recession will be “prolonged and deep”.

“It’s not even clear that there is going to be a technical recession in the euro zone, but I just wouldn’t rule it out ,” Isabel Schnabel, a member of the ECB’s Governing Council, told Reuters in an interview last week . From the Bundesbank, on the other hand, they do see it very likely that the German economy will enter a recession at the beginning of next year.

The ECB will meet again on September 8 to make a new decision on interest rates. In its previous appointment, the institution undertook the first increase in the price of money in 11 years in the eurozone, of 50 basic points . All the macro references known this Tuesday increase the pressure on Christine Lagarde and the rest of the members of the ECB, especially if the fact that the euro has become less valuable than the US dollar is also added to the equation (with the consequent impact in economics ).

“We think there will still be a 50 basis point rate hike in September. After that, we think the rapid cooling of the economy will cause the ECB to pause its rate hike cycle , if we can call it that,” they anticipate. from ING Economics.