“Eurozone economic growth has deteriorated sharply, falling to a 16-month low in June.” This is the first sentence from S&P Global in its commentary on the euro area PMI leading indicator. The situation in Germany does not seem much better. The PMI data confirms an open secret: the euro zone economy is close to experiencing a contraction in its economic activity (it takes two quarters in a row to speak of a recession). The markets already quote this scenario, not only with the falls of the past days, this Thursday the reaction of the different assets, although restrained, suggests that investors are beginning to position themselves against a recession: stock markets and oil (assets risk), while the dollar and the yen (haven) are strong.

The composite PMI for the euro zone presents several worrying data, but one is particularly so: the manufacturing PMI for production has contracted for the first time in two years, while the services sector has cooled “considerably”. The markets are the reflection of these advanced indicators that allow us to anticipate the behavior of the economy with great precision. It has always been said that GDP is a good indicator, but it is too late. Its publication comes late in the day and we have to wait for two consecutive quarters of contraction to make the recession official, a scenario that seems increasingly likely.

Investors and markets are beginning to price in this scenario. The stock markets have started the morning with intense drops of more than 1% in the main European markets. Banking and growth stocks (the most sensitive to the cycle) lead this correction. Among the risk assets, the drop in oil also stands out, losing 110 dollars with a decrease that already exceeds 2%. A recession would undoubtedly reduce the demand for crude, so the price is reacting with falls that discount this possible future scenario.

On the other hand, sovereign bonds have once again become a safe haven. The German bund rises sharply in price, while interest rates fall below 1.5%. Also enjoying gains are French and Dutch bonds… and the American bond, whose return (always inverse to price) stands at 3.10%.

The last leg of this ‘recession mode’ is that of the currencies. The yen and the dollar function as safe havens again. The dollar rises sharply (+0.4%), while the yen rises more than 1% against the euro. Both currencies are considered haven assets in times of uncertainty, volatility and fear. On the other hand, gold remains stable at 1,840 dollars per ounce.

The threat of recession grows in Europe

The PMIs for June in Germany, France and the euro zone leave no puppet with a head for the European economy. Economic growth slows seriously to its lowest in sixteen months, as demand weakens and inflation continues to pressure activity. The first reading of the index stands at 51.9 points compared to the figure of 54.8 points. The slump in activity is larger than the market consensus expected and brings euro dominance closer to feared recession.

The 50 points is the line that separates the growth of economic activity from the contraction. “Putting aside the months of pandemic lockdowns, the slowdown in June was the sharpest slowdown recorded by the study since the worst of the global financial crisis in November 2008,” said Chris Williamson, chief economist at S&P Global. Market Intelligence.

The PMIs have become one of the most reliable leading indicators to detect sudden drops in GDP, as happened with the impact of Covid, as they are massive surveys of companies from different sectors.

Eurozone economic growth is showing signs of faltering as the tailwind of pandemic-suppressed demand is already fading, having been offset by the cost-of-living shock and falling business and consumer confidence. consumers”, comments Chris Williamson, chief economist at S&P Global, in the heat of these data. Both consumer and wholesale inflation are at levels never seen in the history of the euro zone.

Both the service sector and industry reflect a standstill in demand growth. Manufacturing production contracted for the first time in the last two years and economic growth in the services sector slowed considerably, falling to 52 points and 52.8 points, respectively.

Companies also reported lower expectations for business activity over the next twelve months, marking the lowest level since October 2020. Both the lack of demand growth and the worsening outlook were largely linked to rising inflation, tighter financial conditions and concerns about energy and supply chains generated by the war in Ukraine and ongoing disruptions from the pandemic.

Meanwhile, price pressures remained elevated and reached levels not seen before the pandemic, although a moderation in cost growth for the third month in a row suggests that the rate of inflation may have started to ease. Intelligence.

“Today’s PMIs have two standouts: taking stock of recession concerns and getting hints at peak inflation, but the big question is whether June marks the end of the post-omicron reopening effect or summer tourism will give it one more final push before negative real wage growth and weak consumer confidence take over and cause a further slowdown.”

France faces recession

French private sector activity in June fell more than expected, according to the PMI survey. The index records the biggest drop since November 2020, falling 4.2 points to 52.8 points, the lowest level in five months. “The slowdown was driven by weakening trends in both major sectors, services and manufacturing,” says Joe Hayes, economist at S&P Global Market Intelligence.

The French industry suffered the first drop in production since October 2021 and demand falls back to the lowest level in a year and a half. The worst thing is that a similar situation is expected for the services sector. “The slowdown has been aggravated by price pressures, being particularly aggressive in the manufacturing sector, where production and new orders

fell sharply”, comments the expert. And he warns that “it could be what is coming for the services sector”. The PMI survey shows France a recession.

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J. A. Allen

Author, blogger, freelance writer. Hater of spiders. Drinker of wine. Mother of hellions.

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