Germany’s recession is worse than markets had hoped. The German crisis will likely bring the entire European Union into recession.
Germany’s economy continues to falter as the summer comes to an end with fresh PMI data. Europe’s largest economy fell into recession in June, followed this month by the Netherlands, the EU’s fifth-largest economy.
Germany’s service Purchasing Manager’s Index (PMI) reading was expected to be 48.3 in August. The PMI measures changes in manufacturing and service activities, showcasing a country’s industrial and business outputs. Any measurement below 50 points is considered a contraction, meaning the output was inferior to the previous reading.
Therefore, expectations already positioned Germany in a contracting spot. However, the service PMI was 44.7, even lower than expected.
Germany’s recession is mainly caused by an abrupt drop in industrial (manufacturing) output. Indeed, manufacturing PMI in August was 39.1, deep into recession territory.
Economists hoped the service sector could mitigate Germany’s recession, but the latest PMI reading shows it is not the case. "Any hope that the service sector might rescue the German economy has evaporated. Instead, the service sector is about to join the recession in manufacturing, which looks to have started in the second quarter," said the chief economist at Hamburg Commercial Bank Cyrus de la Rubia.
Looming stagflation
Paired with high inflation all across the European continent, Germany’s short and medium-term prospects look grim.
Germany’s recession was caused by two main factors: the illegal Russian invasion of Ukraine and the subsequent halt in Russo-European trade, and the constant interest rate hikes by the European Central Bank.
Prior to the Ukraine war, Germany imported more than half of its natural gas from Russia. Natural gas was a crucial commodity fueling the German gigantic manufacturing sector. Its absence caused an obvious and sudden drop in industrial output.
On the other hand, European inflation predates the conflict, though it was certainly worsened by it. In order to contrast rampant inflation, which reached double-digit numbers at its peak, the ECB has raised interest rates in 11 consecutive meetings.
High-interest rates are now pressuring European businesses, with Germany and the Netherlands on the frontline because of the energy crisis.
ECB governor Christine Lagarde presented no timeline for a halt or even a stabilization of rates. Markets hope the ECB will stop raising rates in September, but with headline inflation at 5.3%, it appears highly unlikely.
The most optimistic analysts’ predictions put the first ECB rate cut in mid-to-late 2024. By then, it’s likely every major European economy will have fallen into recession, especially without Germany’s vital support.
And that’s without factoring in another winter of the war, which looks extremely likely as the Ukrainian frontline froze once more.
