European bond yields fell, stock markets declined, the euro strengthened, and Brent crude prices dropped due to demand concerns.

European bond yields declined last week, influenced by recent economic data that bolstered expectations of an ECB rate cut on September 12. The yield spread between French and German benchmark bonds widened by 2.8 bp. Equity markets experienced widespread downturns, with all major indices closing lower. The euro appreciated against the dollar, reaching an exchange rate of 1.1085. In the commodities sector, Brent crude oil prices dropped by more than 7%, driven by concerns over rising supply and softening demand.

Euro area GDP grew by 0.2%, with Germany’s ongoing weakness impacting overall performance. The ECB is likely to cut rates on September 12.

In Q2 of 2024, euro area GDP grew by 0.2%, showing a slight deceleration from the previous quarter due to a 1% contraction in Ireland and ongoing economic weakness in Germany. Nonetheless, countries like Spain, Greece, and Croatia exhibited relative resilience, supported by strong services and tourism sectors. Household consumption fell slightly, government spending increased, and gross fixed capital formation declined. In August, the euro area Composite PMI reached 51, driven by a robust services sector, but the manufacturing sector, especially in Germany, remained very weak. Despite an unexpected 2.9% rise in factory orders in Germany in July, industrial production fell by 2.4%, reflecting persistent economic challenges. These factors suggest that Germany will likely continue to dampen the EU's overall economic performance. Consequently, the ECB is expected to announce a rate cut at its next meeting on September 12.

In Q2 2024, euro area GDP grew by 0.2%, hindered by a 1% contraction in Ireland and persistent weakness in Germany. A stronger growth rebound is expected next year.

The GDP of the euro area expanded by 0.2%, reflecting a deceleration of 0.1 percentage points from the growth rate observed in Q1. Yearly, GDP increased by 0.6%, surpassing the 0.5% growth recorded in the preceding quarter. The marginal slowdown is primarily attributed to a notable 1% contraction in Ireland and weakness of Germany. This data indicates that economies with robust service and tourism sectors, such as Spain, Greece, and Croatia, are performing relatively better. Conversely, Germany’s predominantly industrial economy continues to impede overall European economic performance due to stagnation.

Household final consumption expenditure in the euro area declined by 0.1%, while government final consumption expenditure rose by 0.6%. Gross fixed capital formation experienced a decrease of 2.2%. Additionally, unemployment increased slightly, though at a slower rate compared to the first quarter.

Considering Germany's significant economic influence within Europe, we expect that a swift recovery in Eurozone growth is unlikely. While lower interest rates may mitigate some cyclical challenges facing Germany, the country is also contending with structural issues. We project a more substantial economic recovery in the forthcoming year.

The Eurozone saw modest growth in August, driven by services, while German manufacturing deepened its contraction, signalling ongoing economic fragility despite potential ECB rate cuts.

The Eurozone Composite PMI Index indicated moderate economic growth in August, reaching a 3-month high of 51. This uptick was primarily driven by the services sector, which posted its strongest quarterly performance, while manufacturing continued its contraction, now extends to more than a year. Despite this improvement, the Eurozone economy remains fragile, with declines in new orders, employment, and business confidence. Moreover, although cost inflation eased, sales prices increased at the fastest rate since April, which could influence the ECB's upcoming decisions.

Of particular concern is Germany's manufacturing sector, which constitutes a fifth of the European economy and saw a deeper contraction in August. The PMI for Germany fell to 42.4 from a revised 43.2 in July, remaining below the 50 mark that signifies growth. The steepest decline in incoming orders since last November was the primary driver of this downturn, reflecting further reductions in order books and employment, signalling underutilized capacity in factories.

We maintain that Germany will be the last major European economy to return to growth and will continue to weigh on EU economic performance. The anticipated ECB rate cut in September may help stimulate broader economic activity.

Germany saw a surprising 2.9% increase in factory orders for July, defying expectations. Despite this, industrial production fell 2.4% MoM, reflecting ongoing challenges and a weak economic outlook.

Germany experienced an unexpected positive development as factory orders rose for the second consecutive month, increasing by 2.9% in July compared to June, contrary to economists' forecasts of a 1.7% decline. Additionally, the previous month's growth was revised up to 4.6% from an initial 3.9%. However, this uptick was largely driven by large-scale orders; without these, the measure would have decreased by 0.4%. Despite this, the broader industrial sector continues to face challenges, as industrial production fell 2.4% MoM in July, following a 1.7% decline in June. This signals a weak start to the third quarter and underscores difficulties in achieving a good economic growth. Yearly industrial production has declined over 5%, mainly due to lower activity in the automotive, electronics, and metal sectors. Although exports increased by 1.7% MoM, a surge in imports by over 5% has reduced Germany's trade surplus to €16.6 billion from €20.4 billion. The industrial sector remains over 10% below pre-pandemic levels and exhibits low-capacity utilization, except in food and apparel production. Given the slowing US and Chinese economies, persistent trade tensions, and rising insolvencies, the prospects for a robust recovery driven by exports are limited. Nonetheless, the rise in industrial orders over the past two months provides some hope for a potential cyclical rebound later in the year.

We do not expect significant improvements in Germany's manufacturing sector until mid-2025. The German economy will continue to be a drag on the growth of the EU.