Although some economists describe the current situation as stagflation and others prefer the term recession, forecasters do agree that the European economy will shrink in the second half of the year. In its latest summer economic , the European Commission has revised downwards its estimate of European single market growth for 2022 from 2.7% to 2.6%. For 2023, the EU executive is now counting on growth of 1.4%, compared with 2.3% in its previous forecast.
Lower growth means lower economic activity. Given that European inflation is the result of a supply shock, the continent’s economy remains sensitive to any contraction.
Beyond the statistical models that allow economists to predict declining growth figures, some indicators already point to the economic contraction that has begun in Europe at the end of the first half of this year. The Purchasing Managers Index is the main indicator to look at, presenting purchasing managers’ perceptions of current and future business conditions. Ranging from 0 to 100, an index below 50 indicates a contraction, while a higher figure indicates an expansion of the economy. In June this year, the PMI showed a score of 34.6 for the EU. Although well below 50, this result nevertheless shows some improvement in the conditions of the European economy over a year. In June 2021, the PMI recorded a score of only 19.6 points.
The trade deficit
Another indicator to consider is the trade balance. For a year now, the eurozone’s foreign trade has been steadily sinking into the red. Its monthly surplus amounted to €18.6bn in 2019. Between January and April of this year, the eurozone’s foreign trade, on the other hand, showed an average monthly deficit of €21bn. In April, the trade deficit even reached a peak of €32bn.
European sanctions against Russia have had an impact on the euro area’s trade balance. Many exporting companies have been discouraged from trading with their Russian partners. In addition, the Russian economy is currently contracting as a result of the sanctions, which is significantly reducing demand for goods from Russia. While exports of goods from the eurozone to Russia amounted to almost €6bn at the beginning of 2022, they now stand at only €2.5bn halfway through the year.
Although slightly down since the end of last year, the value of imports from Russia was €16.1bn by mid-2022, a figure inflated by the surge in raw material prices. As the trade balance is the difference between exports and imports, this record import score from Russia does not bode well for the months ahead.
The weakening euro
The impact of the economic slowdown in China, the world’s largest manufacturing centre, should not be overlooked on the euro area’s trade balance either.
The weakening of the euro against the dollar does not help the European trade balance, as many commodities are denominated in dollars. On 12 July, the euro/dollar pairing , weighing among other things on the spending of European companies importing products traded in dollars. As of 18 July, the euro was trading at $1.01. However, ING analysts expect the euro/dollar pair to fall to $0.9545 during July and August.
While weak signals of a contraction in economic activity in Europe are leading to fears of a recession by the end of the year, this has become the base case for several analysts, such as the Economist Intelligence Unit, which said that Germany will be in a in the second half of the year.
This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. . Read the original French version of this article on .