Rarely is a recession so telegraphed. After the summer, the situation was going to get rough and preliminary PMI data in September confirm the worst case scenario. They anticipate a drop in GDP, in the third quarter, of 0.1%. The slowdown in economic activity is the largest recorded since 2013. Experts speak unequivocally of the beginning of a recession in the Old Continent. The worst part is taken by Germany, the great economy of Europe most exposed to Russian gas. “The deterioration of its economy is at a pace not seen outside of the pandemic, since the global financial crisis.”
After preliminary PMI readings for September from Germany and France that have made clear the European economic deterioration, the global ones for the eurozone confirm the trend. The manufacturing PMI falls from 49.6 to 48.5 points. Services fell from 49.8 points to 48.9. The composite falls from 48.9 to 48.2. It’s the worst read in 20 months. All the indicators deepen in contractionary territory (less than 50). The only consolation is that the figures have been quite close to analysts’ forecasts.
The translation in the GDP of the eurozone. “I know glimpse a recession in the eurozone, as companies report worsening business conditions and intensifying price pressures due to rising energy costs. Early PMI readings indicate an economic contraction of 0.1% in the third quarter, and the pace of decline has accelerated over the three months to September to signal the worst economic performance since 2013, excluding the months of pandemic lockdown. Germany is facing the toughest conditions, with the economy deteriorating at a rate not seen outside of the pandemic since the global financial crisis,” Chris Williamson notes in the S&P Global report.
“The pullback was led by manufacturing as the sector continues to suffer from high energy costs, but the services sector also showed marked weakness with the second consecutive decline. We believe the economy has already entered a recession this services growth in the eurozone is slowing markedly, and inflation continues to weigh on consumers’ purchasing power, and while the risk of winter power shortages has receded somewhat, it remains a key risk for prospects,” says Katharina Koenz, an analyst at Oxford Economics.
The president of the ECB, Christine Lagarde, already warned at the beginning of this month of September, the economic slowdown will come after the summer. Nobody is left in the boat that the euro will dodge the recession, as winter approaches.
And now that? stagflation
“The rise in gas and electricity prices in August brings new price pressures to business in September, even though other costs have been moderating due to weakening global demand. This confirms the stagflation environment in which the eurozone finds itself“, notes Bert Colijn, an analyst at ING, in a note.
For consumption does not paint much. “With high energy costs, consumers are left with less money to spend,” the Berenberg experts explain in a recent report. “Unlike oil, high gas prices have probably not yet fully reached households, as electricity and gas providers are only gradually adjusting their selling prices to the market situation, even if governments buffer this. With interventions and aid packages, consumers will have to bear even higher prices,” they add.
The big problem for the euro zone is Germany. “The German economy looks set to contract in the third quarter, and with the PMI showing the slowdown in September and the survey’s forward-looking indicators also deteriorating, the outlook for the fourth quarter does not look good either. The deepening of the decline in business activity September was led by the services sector, which has seen demand weaken rapidly as customers cut spending due to tight budgets and increased uncertainty about the outlook,” notes Phil Smith in the report by S&P Global, the firm that compiles the indices.
Four quarters of recession in Germany
In Germany, the manufacturing PMI was 48.3 points, meeting economists’ estimates and down from 49.1 in the previous reading. The services PMI has suffered a further deterioration from 47.7 to 45.4: analysts expected 47.2. The PMI composite from 46.9 to 45.9, with economists expecting 46 points. All the figures are below 50, which means that we are in activity contraction territory.
“The German economy is cooling down drastically and is facing a harsh winter,” the prestigious IFO Institute anticipated last week, which cut its GDP and inflation forecasts. The worst months are going to be from October to December 2022 and from January to March 2023. The forecast for next year as a whole is for a drop in GDP of -0.3%, after revising growth downwards for this 2022 to 1.6%, from the previous 2.5%.
Deutsche Bank’s prospects are even worse. “Germany is the country most exposed to the restriction of gas supply and we cut our GDP forecast for 2023 from -1% to a drop of 3-4%”, they commented last Wednesday. The fall of the main euro economy drags down the entire euro zone. The German firm forecasts a four-quarter recession that has already begun and that will lead to a 2.2% drop in GDP in the euro zone.
In France data has been more disparate. The manufacturing PMI suffers a bigger blow, going from 50.6 to 47.8 points and entering contraction territory. By contrast, the services PMI has gone from a reading of 51.2 points to one of 53 (expected to fall to 50.5). This has caused the composite PMI to go from 50.4 to 51.2, a higher than expected advance.
“The upward movement of the composite output PMI should not detract from the clear message emerging from the survey as a whole: the French economy is in trouble. The weakness is most striking in the manufacturing sector, where the slowdown accelerated in September. as overstocking in warehouses, rapidly deteriorating demand for goods, increased economic uncertainty and intense price pressures pushed down production volumes,” said Joe Hayes of S&P Global.
UK in technical recession
The S&P Global composite indicator of the health of the private sector (the famous PMI) fell to 48.4 in September, compared to 49.6 in the previous month. Economists had expected a reading of 49, just below the threshold indicating a contraction.
“The economy is probably in a recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “Supply constraints, rising energy prices and rising import costs associated with a weakening pound sterling add to cost pressures.”
Williamson said forward-looking indicators in the S&P report had deteriorated, indicating that the slowdown seen earlier in the year had turned into a recession. The Bank of England said on Thursday that it believes the economy contracted in the second quarter and will continue to shrink in the third, meeting the technical definition of a recession.