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

The German economy is cooling down
Analyst: Looking into the economic abyss

The Monthly Purchasing Managers Index is intended to reflect the mood of the industry and service providers. The value reflects the expectations on Germany’s economic development. According to the latest assessment, economic growth in the euro area is progressively fading.

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

While the barometer for service providers alone fell unexpectedly significantly from 55.0 to 52.4 points, the index for industry fell 2.8 to 52.0 points and then to the lowest level in almost two years. “The drop in foreign orders has been a drag,” S&P explained. Furthermore, domestic demand is also under pressure due to heightened economic uncertainty and persistently high inflation. “The numbers are disappointing across the board,” explained Helaba analyst Ralfcircul.

The unfavorable framework conditions due to high prices, especially for raw materials and pre-products, delivery bottlenecks, staff shortages and rising interest rates have clouded the outlook more clearly than before. The hike in interest rates forecast by the European Central Bank (ECB) for July is therefore out of the question, as monetary policy must tackle record inflation of 8.1 per cent in the euro area. “But long-term interest rate expectations are likely to be dampened.”

“Economic growth is gradually running out”

The purchasing managers’ index for the eurozone economy as a whole fell unexpectedly 2.9 points to 51.9 points, the lowest level in 16 months. “Economic growth in the euro zone is starting to run out,” said Chris Williamson, chief economist at S&P Global Market Intelligence. “Because the strong tailwind due to the backlog of demand linked to the pandemic is fading more and more and has been overcompensated by the shock of the increase in the cost of living and the decline in business and consumer confidence”. The data signaled current growth of “a paltry 0.2 percent,” after 0.6 percent in the first quarter.

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

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