The German economy is heading towards a contraction in the current year. A recent survey of purchasing managers shows that not only industry but also the service sector is now weakening.
The recession in Germany seems even more likely according to the survey results among 800 companies from the private sector. In addition to the manufacturing sector, the service sector is now also likely to shrink. The survey for the month of July by the financial service provider S&P Global paints a surprisingly gloomy picture for the German economy, but also for the entire EU.
In surveys of this type, the purchasing managers of the companies are asked about current incoming orders and order backlogs, but also about purchase and sales prices and the number of employees.
growth threshold 50 points
If the index determined from this is over 50 points, growth in the respective economic sector is assumed. Values below 50 points indicate a contraction in the respective industry. The purchasing managers’ index from S&P Global for Germany as a whole was only 44.7 points in July.
This means a significant deterioration compared to the June value, which was 48.5 points. The value is also significantly weaker than economists who had been interviewed by the Reuters news agency expected: On average, they expected a minimal drop to 48.3 points. The decline is mainly due to a weakening of the service industry, the value of which is now well below the growth threshold: at 47.3 points after 52.3 points in July.
Service providers fall as growth drivers out of
Experts such as Thomas Gitzel, chief economist at VP Bank, are negatively surprised: “Until now, the service sector was still the glimmer of hope, but now the air seems to be gone here too”. A look at the purchasing managers’ index for the manufacturing sector still gives you the chills in the middle of summer, even if there is a surprising improvement from a low level.
At 39.1 points, the industrial index is far from the growth threshold. “The hope that the service providers could save the German economy has evaporated,” says chief economist Cyrus de la Rubia of the Hamburg Commercial Bank (HCOB).
Recession in the Eurozone too?
In the euro zone, too, the signs are now pointing to a downturn after the July data. Here, too, the purchasing manager indices are below the 50-point mark in both industry and the service sector. According to experts, the surprisingly significant decline in corporate sentiment in the euro zone is now also pointing to a recession here. The reading of 47.0 points is the lowest since November 2020. It is the fourth straight decline.
In May, the EU Commission raised its growth forecast to 1.0 percent for the euro area. For Germany, the majority of economic experts had already expected a recession, i.e. a decline in gross domestic product (GDP). The ifo Institute, for example, most recently assumed a decline in GDP of 0.4 percent in its economic forecast from June for 2023, while moderate growth was expected again for 2024.
Interest rate break will more likely
The current development could also influence the monetary policy of the European Central Bank (ECB). Should the economy cool down across the EU, the series of interest rate hikes in the euro area could take a longer break. ECB Director Fabio Panetta had already expressed skepticism about further tightening. He belongs to the dove camp on the ECB Governing Council, who favor a relatively dovish stance and want to keep interest rates low to encourage economic growth.
According to Commerzbank chief economist Jörg Krämer, their position in the Governing Council should now be stronger, as he believes that everything now points to a contraction of the euro economy in the second half of the year: “The ECB will have to significantly lower its optimistic growth forecast ECB will not raise interest rates further in September.”