Germany and France suffer economic setbacks in latest growth figures

Eurozone slump comes as the currency falls below parity to the US dollar

A terminal for connecting floating stations for liquified natural gas under construction near Wilhelmshaven, Germany.   Getty Images
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Flash production figures for the Eurozone's big two economies indicated a slump into recession on Tuesday as Germany and France dropped below the benchmark for growth.

August marked the second month in a row that the S&P Global's flash composite Purchasing Managers' Index (PMI) reading for Germany fell below the 50 mark, down to 47.6 in August from July's final reading of 48.1.

Across the Eurozone the figure was down to 49.2 in August from 49.9 in July, slightly above the median forecast in an economists poll for a bigger drop to 49.0.

The gauge of French private-sector activity by S&P Global dropped in August to its lowest level since the pandemic-related disruptions of early 2021, estimated at 49.8.

New orders declined in both services and manufacturing, with companies the least confident since November 2020. Overall, service activity remained just above the level that indicates expansion, while manufacturing output plummeted.

“High inflation and a waning post-Covid boost to demand has led businesses and consumers to cut back on discretionary spending,” said Joe Hayes, an economist at S&P Global. “European economies look set for a challenging run into year-end.”

A recession in the 19-member Eurozone is now more likely than not as energy costs surge, following Russia’s war on its neighbour. The downturn in activity came despite factories completing old orders and building a surplus of completed products at the fastest rate since the survey began in mid-1997 as they struggled to sell in a falling demand environment.

The stocks of finished goods index climbed to 53.3 from 52.5.

The continent, already enduring the fastest price gains since the common currency was introduced, is also bracing for further increases in interest rates after the European Central Bank hiked borrowing costs last month for the first time since 2011.

“The slowdown in the economy is increasingly taking a toll on firms’ hiring activity, with employment growth easing to its weakest for almost a year-and-a-half in August," said Phil Smith, economics associate director at S&P Global Market Intelligence.

"A first fall in backlogs of work for more than two years points to capacity pressures across Germany’s private sector economy starting to ease and represents a downside risk to job creation going forward."

A ship sails on the Rhine in Cologne, Germany. The waterway is a vital trade route.  Getty

In Germany, which relies more than most on the Kremlin for natural-gas supplies and is facing the prospect of shortages this winter, output began to shrink in July and contracted again in August, S&P Global said in a separate release.

The euro dropped to the latest two-decade trough on Tuesday as Europe was buffeted by concerns about energy supply and economic growth, while the dollar held firm against major peers, supported by safe-haven flows.

The euro hit $0.9909, its lowest since late 2002, and was last down 0.29% at $0.9914.

Russia will halt natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of the month, the latest reminder of the precarious state of the continent's energy supply.

Heatwaves in the continent have already put a strain on energy supply and worries are growing that any disruption during the winter months could be devastating for business activity.

Updated: August 23, 2022, 12:14 PM