Five months to the day after the outbreak of war in Ukraine, the European economy is still in deep fatigue. The shock wave of the conflict continues to spread to all the countries of the Old Continent, which have already been shaken by two long years of the pandemic. Governments are preparing people in Europe to be without Russian gas for next winter.
Awaiting this likely deadline, the PMI indices released on Friday July 22 show that the European economy is collapsing at high speed. The synthetic indicator for the euro zone entered negative territory in July at 49.4 against 52 in June. This is a 17 month low. As a reminder, the activity is in decline when this index, which is closely analyzed in economic and financial circles, falls below the threshold of 50 points; and it expands when it exceeds this number.
” If we exclude periods of sanitary confinement, the decline in total activity recorded in July was the first since June 2013. It also shows a quarterly decline in GDP of around 0.1%, ie a marginal rate of decline today, but that, due to the sharp decline in new business, the decline in business volume in prices and visual impairment. for the event, should be accelerated in the coming months”, said Chris Williamson, chief economist at S&P Global Market Intelligence.
Within the euro zone, it is Germany’s that the fall in activity is the most marked, with a drop in the index PMI to 48, the lowest level since June 2020. In a blog post published on Friday, IMF economists revised their growth projections for Germany downward, from 2.9% to 1.2% for 2022. In France, activity continued to increase in July, but at a much slower pace, with a PMI of 50.6 in July. Beyond these economic indicators, the economic slowdown has turned into a more systemic crisis.
Inflation threatens the European economy
The rising cost of living is rocking Europe’s economy. The war in Ukraine pushed the price index to a record high last June by 8.6% year-on-year according to the latest figures from the European Commission. Due to the rise in the price of energy, raw materials and shortages, inflation is gradually eating away at the purchasing power of households in Europe.
In France, a study by the Economic Analysis Council (CAE), published on Thursday, July 21, shows that households at the bottom of the scale are getting more of their modest savings. The middle classes have a savings stock that matches the pre-covid trend. As for the richest, they have a higher stock of savings. In Europe, inflation is likely to weigh on demand from families with the strongest propensity to consume. Recent business trend surveys also show that household confidence is in free fall. Finally, taking inflation into account, the standard of living for many Europeans has begun to fall.
The industry in red
Europe’s productive equipment drivers are on the front line in the face of this energy crisis. In July, the PMI index fell to 49.6 against 52.1 in June. This is the lowest level in 25 months at the height of the pandemic. ” Apart from those observed during periods of sanitary confinement, the decrease in activity recorded in July was the most marked since December 2012, line the S&P economists.
This fall is largely explained by the continuing difficulties of the German industry, which is particularly exposed to the consequences of the war in Ukraine and supply difficulties. “It is in the manufacturing sector, where a weaker-than-expected number of new orders has led to an unprecedented increase in unsold inventories, that the situation is particularly worrying. underlines Chris Williamson.
Services are almost at a standstill
On the service side, the indicators are also red. The PMI index fell from 53 in June to 50.6 in July, thus facing a decline. Many branches have experienced a reduction or slowdown in recreational activity, transportation or even tourism. This lower activity is partly explained by the rising cost of living for a large number of Europeans who are forced to make more drastic choices in their daily lives in the face of running inflation.
In real estate and the banking sector, analysts also report difficulties due to the particular tightening of financial conditions for several months. Due to the weight of the tertiary sector in the European gross domestic product (approximately 65%), all these bad signals do not suggest a favorable outlook for the end of 2022 and the beginning of 2023.
This sudden slowdown in growth in Europe should mechanically lead to a rise in unemployment. While the unemployment rate defined by the International Labor Office (ILO) continues to decline in the first half, reaching 6.6% in the euro zone at the end of May, the trend may be reversed. In fact, the removal of aid put in place during the pandemic and the tightening of the financial situation will undoubtedly lead companies to cut their workforce.
In France, economists from the OFCE believe that companies make “ stay in handwork » due to the level of activity calculated since the start of the war in Ukraine. Many economists expect “grow less rich with work”. Rising unemployment in the euro zone will affect overall demand and corporate order books, which have already been weakened by rising energy prices and supply constraints.
Political crisis in Italy
This decline in activity comes as Italy is going through a major political crisis. The departure of Italian council president Mario Draghi has the effect of a bombshell in Europe. Arrived at the head of the government in February 2021 to get Italy out of the health and economic crisis, Mario Draghi74, presented his resignation on July 14 to President Mattarella, who immediately refused it. A few days later, the former president of the European Central Bank finally left his post after several setbacks in the Italian parliament. The next day, theItalian President Sergio Mattarella has announced the dissolution of the Senate and the Chamber of Deputies, which will automatically lead to early elections this fall in the euro zone’s third-largest economy.
Markets are closely monitoring the situation in the euro zone’s third-largest economy. The “spread”, the closely watched gap between German and Italian ten-year interest rates, rose to 240 basis points, reaching its highest level since mid-June. In this political crisis, Italy has entered a zone of uncertainty while the economy is shaken on all sides by the effects of the war in Ukraine.
The European Central Bank on a ridge line
After ten years of accommodating monetary policy, the Central Bank decided to tighten the monetary screw by announcing a 50 basis point hike in its rates, much to the surprise of some economists. Its main interest rate fell from 0% to 0.5% and its deposit rate was raised from -0.5% to 0%. Similarly, the monetary institution launched the IPT, the transmission protection instrument. This anti-fragmentation device should allow the purchase of primary public securities.
Christine Lagarde’s announcements mark a turning point ten years after the sovereign debt crisis in the euro zone where the ECB came to save the European economy. Above all, the Frankfurt institute played a major role during the pandemic by implementing extraordinary accommodative fiscal policies, lowering rates and proposing major programs to buy back public debt securities. . As a result, the central bank’s balance sheet jumped by almost 20 points in almost a year. Faced with high inflation, the Central Bank is on edge. By ending the period of free money, it hopes to curb prices quickly while preserving activity. A bet that could be risky at a time when tensions in energy markets are at their highest.