Europe's economic woes deepen as Germany's outlook worsens

"What a sharp decline. The May data was already alarming, but June paints an even gloomier picture," commented Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, regarding the series of poor data emerging from the German economy. T

The German economy has recently been sending negative signals, which do not bode well for European economic growth. The latest is the business climate index published by Ifo for Germany on Monday, based on monthly surveys of around 9,000 companies. The index recorded a significant drop in June—its value fell to 88.6 points from 89.3 points in May. The reason is businesses' more pessimistic expectations regarding the coming months.

Significantly, the German manufacturing sector has seen a deterioration in the business climate after three consecutive positive readings. This means that after a brief period of relative optimism, companies have again expressed more significant scepticism about the prospects for the coming months. Their particular concerns were sparked by a shrinking order book.

Clemens Fuest, president of the Ifo Institute, does not doubt that the German economy is struggling to overcome stagnation. This is also evident in other indicators, including the PMI published on Friday, which will be discussed shortly.

Data published last Friday shows that economic activity in Germany did grow in June for the third month in a row, but the growth rate was only marginal, according to S&P Global data. The primary composite index fell from a 12-month high of 52.4 points in May to 50.6 points, signalling a marked slowdown in expansion in the private sector.

The reading is again close to the notional 50-point boundary, which marks the boundary between recovery and recession. Industrial production recorded a solid and accelerated decline, the steepest in three months, while service activity continued to grow at a good pace, albeit slightly slower than in May.

What a sharp decline at the end of the second quarter. After the promising signs of a rebound, the industry hit a wall and started to move in the opposite direction in June - wrote Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, in a commentary on the data. The collapse in production is quite depressing, but even more worrying is that new orders are falling at a much faster rate. The May data was already alarming, but the June readings paint an even gloomier picture - he added.

The economist pointed out that all indicators suggest that demand for industrial goods in Germany is not increasing despite an improving global economic environment. "It's not just about the significant decline in order inflow from domestic and foreign markets, but also the persistent decline in inventories. This trend has been observed since the beginning of 2023. Over the past three months, companies have been selling off their finished goods inventories at an increasing rate. This is a clear signal that demand recovery is stalling," he assessed.

The data was also commented on by experts from Credit Agricole. In their view, the main factor limiting activity in Germany remains weak demand, reflected in a deepening decline in new orders overall, including export orders.

"The factor stabilising economic activity remains the fulfilment of backlogged production. These have been declining steadily since June 2022. In June, the pace of their loss slightly accelerated again after a temporary slowdown in previous months," reads a report by the bank's analysts.

There has been more negative news from Europe in recent days. The PMI for the entire eurozone dropped to 50.8 points in June from 52.2 points in May. The index is clearly below market expectations.

According to preliminary PMI data collected by S&P Global, the slowdown in economic activity growth in the eurozone in June was due to weaker expansion in the services sector and a more pronounced decline in industrial production, which fell at the steepest rate since the start of the year.

Did the industrial recovery end before it even began? Both S&P and other economists had predicted that after the rise in the index in May, there would be another increase in June, potentially opening the way to a growth trend. However, instead of moving towards expansion, the PMI fell, dashing hopes for a recovery - commented Cyrus de la Rubia.

According to the expert, the sharp decline in new orders suggests that "the recovery may be further away than initially anticipated."

What will July bring? According to S&P, it is worth paying attention to France. The deteriorating situation in services and industry across the Channel may be linked to the results of the recent European Parliament elections and President Emmanuel Macron's announcement of early parliamentary elections, scheduled for 30 June.

This unexpected turn of events has likely caused a lot of uncertainty about future economic policies, prompting many companies to halt new investments and orders. France's weak financial performance has significantly contributed to the worsening economic situation in the eurozone - de la Rubia points out.