Germany leads as Europe slides into recession amid supply shortages

Europeans returning from their summer holidays will find a more fragile economy that risks collapsing under threats of energy rationing, record inflation and tighter monetary policy.

Purchasing managers’ indices due on Tuesday will likely show private sector output down for a second month, adding to signs that a recession in the 19-nation eurozone is now more likely than not. German, French and Italian business confidence gauges will likely confirm this direction.

Germany, Europe’s largest economy, has emerged as the region’s weak spot, with its oversized industrial base suffering disproportionately from soaring energy costs and a persistent supply shortage. Meanwhile, services are not experiencing the same kind of tourism boom that is sweeping countries around the Mediterranean as holiday travel picks up after Covid.

An update on Germany’s second-quarter performance on Thursday will reveal whether the initially reported negligible contraction, small enough to round off, will be revised to a larger contraction, or whether consumer spending has been strong enough to avoid a decline in production – for now.

Data over the coming week will be key ingredients for discussions on the direction of monetary policy after the European Central Bank raised rates by half a point in July and signaled “further normalization” in September without first committing to the size. The next ECB meeting is less than three weeks away and most policymakers have yet to voice their preferences.

A report from the July meeting scheduled for Thursday can provide insight, and about half of the ECB’s 25 rate setters – including executive board member Isabel Schnabel and Bundesbank chief Joachim Nagel – will have the opportunity to share their views at the Kansas City Fed Annual Meeting. Economic Policy Symposium in Jackson Hole, Wyoming.

The President of the ECB, Christine Lagarde, will not make the trip to the Grands Tétons this year. But her comments following the July decision, along with a further rise in inflation to just under 9% and expectations that price pressures will increase further, suggest she is leaning towards a measure. more important: “We need to bring inflation down to 2% in the medium term,” she said. “Time to deliver.”

“The minutes of the July 21 ECB meeting could offer clues as to whether investors should brace for another 50 basis point rate hike in September. Given widespread inflationary pressures, a sharp increase is our base case scenario.

Central bankers from around the world are also heading to Jackson Hole, with Federal Reserve Chairman Jerome Powell due to speak on Friday. Ahead of that, Chinese banks are likely to cut their benchmark prime lending rates for the first time in months, while monetary policy authorities in Israel, Iceland, South Korea and Botswana are among those expected to raise rates.

Elsewhere in Western Europe, it’s been a fairly quiet week, with UK PMI readings expected for Tuesday.

In the East, data due on Wednesday will likely show Russian industrial production fell in July at the fastest rate since the start of President Vladimir Putin’s war in Ukraine, as energy production tumbles amid a stalemate with the rest of the continent.

Iceland’s central bank is expected to raise its key rate by 75 basis points to 5.5%, keeping it ahead of its developed peers on tightening as the property boom continues to fuel the economy. price growth.

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