EU Economy: Weekly Commentary – November 28, 2023
Eurozone View Synopsis
Given Europe's current fragility and the escalating likelihood of a recession, the ECB is poised to halt its trend of raising interest rates. Our projections hint at a potential shift toward implementing rate cuts in the third quarter of 2024.
Following a week characterised by limited economic data in Europe, the persistent contractions in manufacturing indices and the negative growth in Germany, a pivotal European powerhouse, stand out prominently. These indicators sharply depict the economy's underlying weaknesses. Coupled with declining inflation, this scenario does not support the case for an ECB rate hike at the December 14, 2023 meeting. Furthermore, the mounting prospects of a recession in Europe are concerning. We anticipate surges in defaults, potential strains on banks, reduced household expenditures, and the overarching influence of ongoing tensions and conflicts, collectively, these elements suggest the possibility of a European recession next year.
Following a week characterised by limited economic data in Europe, the persistent contractions in manufacturing indices and the negative growth in Germany, a pivotal European powerhouse, stand out prominently. These indicators sharply depict the economy's underlying weaknesses. Coupled with declining inflation, this scenario does not support the case for an ECB rate hike at the December 14, 2023 meeting. Furthermore, the mounting prospects of a recession in Europe are concerning. We anticipate surges in defaults, potential strains on banks, reduced household expenditures, and the overarching influence of ongoing tensions and conflicts, collectively, these elements suggest the possibility of a European recession next year.
European Central Bank Commentary
The Vice President of the European Central Bank (ECB), Luis de Guindos, highlighted the escalating challenge of debt repayment and mentioned that the European stock market is now overvalued. This cautionary message appears to be influenced by declining bond yields and aims to instil a degree of apprehension within the market. However, even amidst these concerns, it's evident that the European economy remains markedly weak.
The vice president of the European Central Bank (ECB), Luis de Guindos, cautioned about potential challenges facing households, businesses, and governments in the euro area regarding debt repayment, stemming from the recent interest rate hikes by the institution aimed at curbing inflation.
Financial stability prospects within the euro area, as highlighted by the ECB, remain precarious and show no signs of improvement. The tightening financial conditions are increasingly permeating the real economy amidst sluggish growth, elevated inflation, and escalating geopolitical tensions.
Our assessment underscores Europe's issues, with major economies struggling. Defaults will increase in the coming months due to increasing debt payments. The Eurozone faces heightened prospects of a recession owing to the prevailing economic fragility.
The vice president of the European Central Bank (ECB), Luis de Guindos, cautioned about potential challenges facing households, businesses, and governments in the euro area regarding debt repayment, stemming from the recent interest rate hikes by the institution aimed at curbing inflation.
Financial stability prospects within the euro area, as highlighted by the ECB, remain precarious and show no signs of improvement. The tightening financial conditions are increasingly permeating the real economy amidst sluggish growth, elevated inflation, and escalating geopolitical tensions.
Our assessment underscores Europe's issues, with major economies struggling. Defaults will increase in the coming months due to increasing debt payments. The Eurozone faces heightened prospects of a recession owing to the prevailing economic fragility.
PMIs and European confidence commentary.
The Eurozone manufacturing sector slowed its pace of contraction alongside the services sector in November. Eurozone, particularly France and Germany rose their PMIs and started to show signs of recovery. Even now, the Christmas season is coming so the number of orders could increase and the next PMIs could be close to the breakeven. For the moment high prices of goods are affecting demand from consumers.
The Eurozone's composite PMI remains in contraction territory at 47.1, slightly up from October's 46.5, while the services sector saw a modest uptick to 48.2, signalling improvement compared to the previous month. However, even Germany, the leading European powerhouse, grapples with ongoing struggles. Despite a significant jump in its Composite PMI to 47.1 in November from 45.9 the month before, it marks the fifth consecutive month of contraction. Furthermore, Germany's services PMI, though slightly improved, remains within contractionary levels. The industrial sector faces considerable challenges, yet amid the approaching holiday season, there's a glimmer of hope for the German economy as recent data show signs of recovery surpassing expectations. France has worse situation, with both composite and services PMIs continuing to contract.
The persisting economic fragility is evident in the ongoing contraction of manufacturing and services PMIs. Given this backdrop, we advocate for the European Central Bank (ECB) to maintain the current interest rates. Altering these rates could further strain the already delicate economy, potentially pushing it toward a recession, an outcome that appears increasingly probable.
The Eurozone's composite PMI remains in contraction territory at 47.1, slightly up from October's 46.5, while the services sector saw a modest uptick to 48.2, signalling improvement compared to the previous month. However, even Germany, the leading European powerhouse, grapples with ongoing struggles. Despite a significant jump in its Composite PMI to 47.1 in November from 45.9 the month before, it marks the fifth consecutive month of contraction. Furthermore, Germany's services PMI, though slightly improved, remains within contractionary levels. The industrial sector faces considerable challenges, yet amid the approaching holiday season, there's a glimmer of hope for the German economy as recent data show signs of recovery surpassing expectations. France has worse situation, with both composite and services PMIs continuing to contract.
The persisting economic fragility is evident in the ongoing contraction of manufacturing and services PMIs. Given this backdrop, we advocate for the European Central Bank (ECB) to maintain the current interest rates. Altering these rates could further strain the already delicate economy, potentially pushing it toward a recession, an outcome that appears increasingly probable.
German GDP
Germany, currently facing economic challenges more pronounced than those of other EU nations, experienced a contraction in its economy during the third quarter of the year. Projections suggest the possibility of continued negative growth into the fourth quarter.
In the quarter, the German economy experienced a drop in economic activity of 0.1 per cent compared to the previous quarter. Throughout the year there was a contraction of 0.4 per cent. The economy is stagnant. It's worth noting that Germany has experienced growth in only two of the last six quarters. The latest drop was not larger thanks to increased consumption and government investments because private consumption fell 3 per cent.
Challenges in trade continue to persist, as evidenced by a 0.8 per cent decline in exports of goods and services along with a 1.3 per cent decline in imports. These ongoing struggles indicate difficulties for the country that bring Germany closer to a possible technical recession.
Despite this contraction, Germany achieved a record number of jobs in the quarter with approximately 46 million people employed, an increase of around 337k people compared to the same period last year. However, there was an increase compared to previous years during this usual fall surge. In addition, there has been a reduction in the working day per employee due to calendar effects and a greater prevalence of part-time employment. This change has also caused a decrease in labour productivity.
We anticipate a resurgence of moderate growth in Germany during the second quarter of 2024, buoyed by a revitalized manufacturing sector and a notable uptick in new orders. Overall, companies are more optimistic now about the future than they were in October.
In the quarter, the German economy experienced a drop in economic activity of 0.1 per cent compared to the previous quarter. Throughout the year there was a contraction of 0.4 per cent. The economy is stagnant. It's worth noting that Germany has experienced growth in only two of the last six quarters. The latest drop was not larger thanks to increased consumption and government investments because private consumption fell 3 per cent.
Challenges in trade continue to persist, as evidenced by a 0.8 per cent decline in exports of goods and services along with a 1.3 per cent decline in imports. These ongoing struggles indicate difficulties for the country that bring Germany closer to a possible technical recession.
Despite this contraction, Germany achieved a record number of jobs in the quarter with approximately 46 million people employed, an increase of around 337k people compared to the same period last year. However, there was an increase compared to previous years during this usual fall surge. In addition, there has been a reduction in the working day per employee due to calendar effects and a greater prevalence of part-time employment. This change has also caused a decrease in labour productivity.
We anticipate a resurgence of moderate growth in Germany during the second quarter of 2024, buoyed by a revitalized manufacturing sector and a notable uptick in new orders. Overall, companies are more optimistic now about the future than they were in October.
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No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750).
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved.