Increased Recession Risk in Europe for H2, According to Macquarie

There is an increasing likelihood of a recession in Europe during the second half of 2024, according to strategists at Macquarie. This concern arises from disappointing economic data and persistent structural issues within key economies, especially Germany.

Recent flash purchasing managers’ indexes (PMIs) indicate that the economic slowdown is intensifying, with both the services and manufacturing sectors facing challenges. For example, Germany’s services PMI dropped to 50.6 in September, down from 51.6 in August, while the Eurozone composite PMI fell below 50, indicating a contraction.

Macquarie highlights that these discouraging indicators emerge at a time when Europe is confronting significant structural challenges. They emphasize the “heightened risk of a recession or very slow growth in core Europe in the second half of the year,” as ongoing structural obstacles continue to impact the region amid global economic shifts.

In contrast, the United States is showing stronger performance, largely thanks to its current easing cycle. However, Europe’s economic vulnerabilities are significantly impacting its outlook.

Germany, being the largest economy in Europe, is particularly at risk. Macquarie notes that the country is facing difficulties due to the collapse of its previous economic model, which heavily relied on inexpensive energy imports from Russia and a robust export market in China. The failure to adapt to these changes, particularly in electric vehicle (EV) production, has left Germany lagging behind competitors such as the US and China, further reducing its industrial output.

Additionally, there is a rise in political polarization in Germany, as evidenced by the strong performance of the far-right Alternative for Germany (AfD) in a recent regional election in Brandenburg. This shift towards political extremism raises concerns that it could contribute to a cycle of political and economic instability.

Macquarie warns that if the electorate continues to lean towards political extremes, the potential for further polarization during the next global recession could be significant.

In light of these concerns, traders may begin to undervalue the euro, particularly as the European Central Bank’s policy responses remain uncertain.