Loss of activity in Germany and France predicts a recession in Europe

The So-called Purchasing Managers Index (PMI), prepared by the S&P Global agency, whose evolution is watched by governments, companies, analysts and central banks, confirmed on Tuesday the economies of Germany and France, the eurozone’s two main engines. , noted contraction in august reflecting deterioration of confidence and decrease in household consumption tendency in the context of high inflationary pressures. According to the same indicator, private sector activity in the euro zone, which was also dragged by Germany and France, contracted again in August. Andrew Harker, economic director of S&P Global Market Intelligence, concludes in the report released this Tuesday.

“Cost of living pressures reduce economic growth The manufacturing sector continued to contract in August and recorded a new record increase in finished product stocks due to the inability of companies to sell products in the market. falling demand,” the analyst adds, before concluding: “This is surplus stock, little chance of improvement For production production in the short run.

The possibility of a recession in the euro area (with negative rates in GDP variation in at least two consecutive quarters) is not part of the ECB’s central scenario, but is an increasingly feared hypothesis. all analysts.

Major indicator

The Eurozone Purchasing Managers Index is compiled from surveys sent to a representative panel of managers from more than 5,000 companies in the manufacturing and services industries in Germany, France, Italy, Spain, the Netherlands, Austria, Ireland and Greece. The index includes: variables related to new orders, production, recruitment, delivery times suppliers, stocks in warehouses, input and purchase prices. Based on this mix of data, these monthly reports are a leading indicator of economic activity as they are published before other comparable reports produced by government agencies.

There is a lot of uncertainty about the evolution of the economy in Spain, Europe and the world, and therefore the PMI as a leading indicator attracts the attention of economic agents. When the PMI indicator drops below 50 points activity contraction.

In August, Germany’s composite PIM index dropped to 47.6 points (the worst reading in 26 months). In France, the same index fell to 49.8 integers. Apart from these two countries, the report, which does not yet provide detailed data on the Spanish economy and the economy of other EMU countries, adds that “total activity in the rest of the euro area continued to increase, albeit slightly.” For the Spanish example, the latest estimates from the Independent Financial Responsibility Authority (Airef) project the economy to contract by 0.2% in the third quarter of the year.

As a whole, the aggregate PMI composite index of activity in the euro area stood at 49.2 points (49.9 in July), recording the lowest level in the last 18 months. “There is currently a decline in production and activity. wide variety of industries“As economic weakness becomes more pervasive, from basic supplies and automotive firms to tourism and real estate firms,” says S&P Global Market Intelligence chief economics officer. First of all, industrial activity in the euro area fell in August, where production fell for the third month in a row and at a massive rate.

bad and good news

Economic activity is affected by decreasing demand. The volume of orders picked up by purchasing managers of companies in the euro area “decreased solidly for the second consecutive month,” according to the report. New orders fell in both industry and services and the accumulation of unsold products is increasing. “Manufactured goods inventories increased at the highest rate in more than twenty-five years of data collection in August, with the accumulation rate setting a new record for the second month in a row.”

this strong inflationary pressures was the key factor in reducing new orders. The first good news, however, is the detection of a lower rise in raw material prices, whose prices continue to rise but at the slowest pace in a year. The second good news the report points to is that executives are seeing problems in global supply chains continue to subside: “Supplier delivery times have continued to lengthen sharply, but Slower pace since October 2020“, specified.

The bad news is that the loss of confidence (economic sentiment was the second lowest since the first wave of the pandemic), the decrease in new orders and the increase in stocks are leading to fewer workers being hired. Employment rose again among companies surveyed, but at a declining pace for the third month in a row.