Eurozone Contracts Further As Germany Heads For Recession

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Economies worldwide had only just started to heal from the pandemic induced slowdown, when another economic recession looks to be closer than we want. Germany, the EU’s top economy and Europe’s export powerhouse, looks headed for imminent recession, according to a closely watched survey that pointed to a deepening eurozone contraction.

There are “growing signs of an impending recession in the eurozone’s largest economy,” S&P Global Market Intelligence said as it released its eurozone purchasing managers’ index for October. The PMI for the 19-nation area fell to 47.1, down from 48.1 a month earlier – its fourth consecutive drop and that fastest decline in nearly two years – as soaring inflation and high energy prices bit deeper.

In Germany, the PMI dropped to 44.1, from 45.7 in September. A reading below 50 signals an economic contraction. Germany’s reading was the lowest since initial business shutdowns in Germany when the Covid-19 pandemic hit. Both manufacturing and services in Germany were showing accelerated rates of shrinkage, though that had yet to feed through into jobs-shedding, the survey showed. German businesses were “deeply pessimistic” about the year-ahead outlook.

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France economy stagnating
In France, the second-biggest economy in the EU, the economy was stagnating, with a PMI of 50 compared with 51.2 in September. Although France is suffering less than other countries in Europe from inflation, rising prices are still putting pressure on consumers, leading to a severe fall in factory orders. Across the eurozone, the PMI indicated that factory output had dropped for the fifth consecutive month, at a rate unseen since the worst of the pandemic. Supply congestion and shortages had eased a bit, against a backdrop of flagging demand. While input demand had slumped, rising energy bills and wage pressure kept costs high.

A eurozone-wide recession “is looking increasingly inevitable,” S&P Global Market Intelligence chief business economist Chris Williamson said. “The region’s energy crisis remains a major concern and a drag on activity, especially in energy intensive sectors.”

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 ECB rate decision
Meanwhile, the European Central Bank’s governing board is expected to deliver a big interest rate cut in a bid to cool inflation. Inflation in the 19-nation eurozone stood at nearly 10% in September, five times the ECB’s target of 2%. The German economy, whose energy-hungry industries relied heavily on Russian gas before the war, is now forecast to shrink by 0.4% in 2023. Higher interest rates typically mean putting a dampener on business activity, as credit becomes more expensive and consumer spending decreases. The EU is struggling to find ways to mitigate energy prices. A summit last week agreed on a number of measures, but a key one, of capping wholesale gas prices, was kicked into future deliberations by Germany, which fears gas supplies being diverted to more lucrative markets in Asia.

Germany’s Euro 200 billion euro plan for consumers
Berlin has unholstered a massive 200-billion-euro (US$ 197-billion) plan to shield German consumers from high energy prices, triggering unease among EU partners at its go-it-alone approach that risks distorting the single market. At the summit German Chancellor Olaf Scholz reluctantly agreed to have the bloc look further at the price cap measure but only after an impact analysis. The International Monetary Fund said that downturns in parts of Europe could turn into “deeper recessions” across the continent. Government support to tackle energy costs and inflation would “only partly” offset those strains, it said. The IMF already predicted that Germany and Italy would slip into recession next year.

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