The euro zone economy has slowed sharply owing to weaker than forecast growth in services and steep falls in manufacturing, particularly in Germany, the results of a closely tracked business survey showed.
A poll of euro zone purchasing managers (PMI) signalled business activity almost ground to a halt this month as its composite index fell to a five-month low of 50.1, leaving it only slightly above the 50 mark that separates growth from contraction.
The results published by S&P Global on Wednesday were weaker than forecast by a Reuters poll of economists, who had expected a slight rise from 50.9 last month to 51.1.
Analysts warn that trade tensions and political uncertainty are likely to cause a slowdown in second-quarter growth when that data is released next week.
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“The weak figures put a question mark over a noticeable economic recovery expected by many forecasters for the second half of the year,” said Vincent Stamer, an economist at German lender Commerzbank, adding that the concerns particularly applied in Germany, the bloc’s largest economy.
The detailed PMI results showed a continued divergence between manufacturing and the larger services sector. The reading for services fell from 52.8 to 51.9, while the manufacturing index dropped from 45.8 to 45.6.
The euro zone economy stagnated for much of last year but returned to growth in the first quarter, expanding 0.3 per cent, as inflation slowed more than wages to boost household purchasing power.
S&P Global said “the economy barely moved in July” as businesses in the currency bloc reported a second consecutive month of falling orders, causing them to halt recent growth in hiring and dragging confidence in the next year to a six-month low.
“It’s unsettling how steadily companies in the manufacturing sector are slashing jobs month by month,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. But he said employment falling less than output indicated “there may still be hope for better times”.
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When the European Central Bank (ECB) held rates last week, president Christine Lagarde said “the risks to economic growth are tilted to the downside”. She noted that services are “leading the way” but manufacturing has “declined in the past few months” and investment also “remains weak”.
Price pressures on euro zone companies picked up at the fastest pace for three months, S&P found. But managers said these were not fully passed on to customers as overall selling prices rose at the slowest pace since October, reflecting increases in services and declines in manufacturing.
Economists said the weaker growth outlook made the ECB more likely to cut interest rates at its next meeting in September. However, sticky inflation in services caused by rapid wage growth is still likely to concern policymakers.
“The combination of a weakening economy and still high price pressures [are] offering some support for both the hawks and the doves,” said Franziska Palmas at Capital Economics. “On balance, though, we still think a cut in September is more likely.”
The outlook brightened in France, where some services companies reported a pickup in activity before the Olympic Games. There was also relief that this month’s parliamentary election did not hand a majority to far-right or left-wing parties even as it left the country struggling to form a government.
The French PMI rose from 48.2 to a three-month high of 49.5, above economists’ forecasts.
The survey’s results for Germany were noticeably weaker than forecast. The German PMI reading fell from 50.6 to a four-month low of 48.7, signalling a contraction of the country’s business activity. German factory output fell at the fastest rate for nine months.
But German consumer confidence rose more than forecast this month, according to separate survey results published on Wednesday by GfK and the Nuremberg Institute for Market Decisions. They said the Euro 2024 football tournament may have helped to lift consumer sentiment 3.2 points to minus 18.4, outstripping economists’ projections for a smaller rise to minus 21. – Copyright The Financial Times Limited 2024
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FAQs
Germany was particularly badly affected by the Wall Street Crash because of its dependence on American loans from 1924 onwards. As the loans were recalled, the economy in Germany sunk into a deep depression. Investment in business was reduced. As a result, wages fell by 39% from 1929 to 1932.
What are the weaknesses of Germany's economy? ›
German companies are confronted with structural challenges such as labour shortages, high energy costs, strict regulations, high tax burden and digitalisation that lags behind other Western countries. Implementing government support programs in Germany is also proving difficult.
When was the collapse of the German economy? ›
In 1929 as the Wall Street Crash. led to a worldwide depression. Germany suffered more than any other nation as a result of the recall of US loans, which caused its economy to collapse. Unemployment rocketed, poverty soared and Germans became desperate.
What is happening to the German economy? ›
Following a recession in 2023, economic activity in Germany is expected to stagnate in 2024. Domestic demand is set to pick up slowly in 2024 and 2025, as real wage growth resumes. However, investment is projected to remain well below pre-pandemic levels, constrained by continued high financing costs.
What is the main cause of the German recession? ›
High interest rates, skilled labour shortages and the country's famed bureaucracy have, say industry figures, plunged the sector into crisis. In 2023 insolvencies in the construction sector rose more than 20%.
How did the economic crisis had a deep impact on German economy? ›
The most obvious consequence of this collapse was a huge rise in unemployment. Over the winter of 1929-30 the number of unemployed rose from 1.4 million to over 2 million. By the time Hitler became Chancellor. in January 1933 one in three Germans were unemployed, with the figure hitting 6.1 million.
What is Germany's greatest economic strength? ›
With a 70% share of the GDP, the service sector contributes by far the largest share of the country's economy. In addition, Germany is a top destination for investors, attracting an ever increasing number of companies to make greenfield investment there.
What was the original cause of Germany's economic problems following? ›
Expert-Verified Answer. The economic problems of Germany following World War I were due to the war reparations that it had to pay as part of the Treaty of Versailles.
What is a current challenge faced by Germans in the workplace? ›
The challenges facing the German working culture include pressure on workers to relocate and reduce labor costs, inequality among workers and in society, and the impact of digitalization on working hours and labor laws.
Did Germany ever pay back reparations? ›
Following the Second World War, West Germany took up payments. The 1953 London Agreement on German External Debts resulted in an agreement to pay 50 percent of the remaining balance. The final payment was made on 3 October 2010, settling German loan debts in regard to reparations.
Germany, the sick man of Europe, is about to end a quarter it would rather forget. The first three months of 2024 probably marked its second straight quarter of economic contraction, and for the full year it's expected to deliver little to no growth.
Who ended German hyperinflation? ›
On 15 November 1923 decisive steps were taken to end the nightmare of hyperinflation in the Weimar Republic: The Reichsbank, the German central bank, stopped monetizing government debt, and a new means of exchange, the Rentenmark, was issued next to the Papermark (in German: Papiermark).
Is Germany struggling financially? ›
Germany is struggling. It was the only G7 economy to shrink last year and is set to be the group's slowest-growing economy again this year, according to our latest projections. Some pundits say Germany's economic model is irreparably broken.
What is the main industry in Germany? ›
Germany's principal industries include machine building, automobiles, electrical engineering and electronics, chemicals, and food processing.
Who has the largest economy in the EU? ›
Germany has the biggest national GDP of all EU countries, followed by France and Italy. In 2022, the social welfare expenditure of the European Union (EU) as a whole was 19.5% of its GDP.
Why was Germany particularly susceptible to a downturn in the economy quizlet? ›
Why was Germany particularly susceptible to a downturn in the economy? Germany owed large debts to other countries after World War I.
Why was Germany particularly susceptible to a downturn in the economy brainly? ›
Germany was particularly susceptible to a downturn in the economy because Germany owed large debts to other countries after World War I.
What were the major factors responsible for economic crisis in Germany during? ›
Germany was under a debt of 6 billion pounds. In 1923, when gold resources were scarce, Germany was forced to give all it's gold to allied powers. When France captured Ruhr in 1923, Germany retaliated by printing currency recklessly which destroyed it's economy and led to an economic crisis in Germany.
Why was Germany's economy struggling after ww2? ›
After World War II, Germany was also facing shortages in food, housing, energy, and more. These shortages contributed to the collapse of Germany's currency and development of a black market in which prices were approximately between 20 and 100 times their legal prices.
