German economy cools down: Analyst: Looking into the economic abyss

German economy cools down
Analyst: Looking into the economic abyss

The monthly Purchasing Managers’ Index is intended to reflect the mood among industry and service providers. The value reflects expectations of Germany’s economic development. According to the latest evaluation, economic growth in the euro zone is gradually running out of steam.

Economic growth in Germany and the euro zone is cooling off surprisingly sharply. The purchasing managers’ index for the private sector – industry and service providers together – fell in June by 2.4 to 51.3 points and thus to a six-month low, as S&P Global announced in its monthly survey of around 800 companies in Germany. Economists had only expected a drop to 53.1 points. The barometer, which is closely watched on the financial markets, is thus only slightly above the 50 point mark, from which it signals growth. The data showed “that the German economy has lost virtually all of the momentum it gained from the easing of corona restrictions,” said S&P Global economist Phil Smith. In the service sector, growth weakened sharply for the second time in a row.

While the barometer for service providers alone unexpectedly dropped significantly from 55.0 to 52.4 points, the index for industry fell by 2.8 to 52.0 points and thus to its lowest level in almost two years. “The declining foreign orders proved to be a brake,” explained S&P. In addition, domestic demand is also coming under pressure as a result of increased economic uncertainty and persistently high inflation. “The numbers are disappointing across the board,” explained Helaba analyst Ralfcircul.

The unfavorable framework conditions from high prices, especially for raw materials and preliminary products, delivery bottlenecks, staff shortages and rising interest rates clouded the prospects more clearly than before. The interest rate hike expected by the European Central Bank (ECB) for July is therefore out of the question, since monetary policy must counteract the record inflation of 8.1 percent in the euro area. “But longer-term interest rate expectations will probably be dampened.”

“Economic growth is gradually running out of steam”

The purchasing managers’ index for the entire economy in the euro zone fell unexpectedly sharply by 2.9 to 51.9 points, its lowest level in 16 months. “Economic growth in the euro zone is starting to run out of steam,” said chief economist Chris Williamson of S&P Global Market Intelligence. “Because the hitherto strong tailwind from the pandemic-related demand backlog is fading more and more and was overcompensated by the shock of rising living costs and falling business and consumer confidence.” The data signaled current growth of “a measly 0.2 percent,” after plus 0.6 percent in the first quarter.

The companies were looking to the future with less optimism than they were last in October 2020. The high inflation, ongoing supply chain problems and now the increasingly real risk of a gas supply stop from Russia are increasingly burdening the economy, said LBBW expert Elmar Völker. “We are looking more and more into an economic abyss – we haven’t fallen yet, but there are not too many steps left to the cliff.” In France, too, the economy slowed noticeably and grew more slowly than at any time since the corona headwind caused by the Omicron wave in January.

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