Heightened risk of recession in Europe in H2, says Macquarie

There is a growing risk of recession in Europe during the second half (H2) of 2024, driven by weak economic data and entrenched structural issues in core economies like Germany, Macquarie strategists said Monday.

Flash purchasing managers' indexes (PMIs) have shown that the economic slowdown is deepening, with both services and manufacturing sectors under pressure. Germany’s services PMI, for instance, slipped to 50.6 in September from 51.6 in August, while the Euro area composite PMI fell below 50, signaling contraction.

Macquarie points out that these weak indicators come at a time when Europe is grappling with larger structural hurdles.

“There's heightened risk of a recession or very slow growth in core Europe in H2, as the structural impediments to growth continue to overlay what's happening in the global cycle,” the note says.

While the US continues to perform better, thanks to its ongoing easing cycle, Europe’s weaknesses are weighing heavily on its prospects.

Germany, Europe’s largest economy, is particularly vulnerable. According to Macquarie, the country "continues to suffer from a breakdown of the original 'business model' of the post-1990 period," which relied heavily on cheap energy from Russia and a strong export market in China.

These pillars have collapsed, and Germany has been slow to adapt. Its underinvestment in electric vehicle (EV) production is now leaving it lagging behind international competitors like the US and China, further diminishing its industrial output.

Moreover, political polarization in Germany is on the rise. The recent regional election in Brandenburg saw the far-right Alternative for Germany (AfD) perform strongly, highlighting the electorate’s shift towards political extremes. Macquarie warns that this could lead to a vicious cycle of political and economic instability.

"If the electorate is shifting to the political extremes already, then imagine what will happen with political polarization in the next global recession," the firm states.

Amidst such risks, Macquarie warns that traders may increasingly discount the euro, particularly as the European Central Bank’s policy response remains uncertain.

Source: Investing.com