Europe adrift without a rudder as France and Germany fight crises

107392634 Europe appears to be headed for recession as its largest economies, such as Germany and France, grapple with domestic political and economic woes.

Data on Monday showed business activity in the manufacturing and services sectors fell much more than expected in September in the two countries, Europe's largest and second-largest economies respectively.

In Germany, the HCOB Composite Purchasing Managers' Index (PMI), which measures business activity in two industries, fell to 47.2 in September from 48.4 in August, hitting a seven-month low and missing expectations of 48.2.

At the same time, France's composite PMI hit an eight-month low of 47.4 in September, lower than August's 53.1 and lower than the expected 50.6. A reading above 50 indicates expansion, while a reading below 50 indicates contraction.

For the euro zone as a whole, S&P Global, which compiles the data, said business activity in the single currency area fell for the first time in seven months in September, falling to 48.9 in September from 51 a month earlier.

The PMI data – a closely watched indicator of economic activity in the region – was the latest to point to a sharp slowdown in Europe's traditional growth drivers, with both Germany and France grappling with domestic political turmoil and economic uncertainty.

Andrew Kenningham, chief European economist at Capital Economics, said in an analysis on Monday that “the sharp decline in the euro zone's composite PMI indicates that the economy is slowing sharply, with Germany entering recession and France's Olympics boost Just a flash in the pan.

Cunningham noted that “France’s growth prospects look increasingly bleak as France’s new minority government plans to sharply tighten fiscal policy,” while for Germany, “the survey also suggests that the country is slipping into a deeper recession.” .

Germany's economic slump is nothing new, with the country's once-thriving export-led economy lingering in recession for more than a year. Before the latest PMI data was released, economists had expected Germany's economic growth to be only 0.3% in 2024. According to the Bundesbank;this European Commission Spring Forecast Even more pessimistic, it is expected to grow by only 0.1% this year.

Cyrus de la Rubia, chief economist at Hamburg Commerzbank (HCOB), said in an analysis on Monday that the country's latest PMI data showed “a technical recession appears to be brewing” . He expects Germany's GDP to fall by 0.2% this quarter from the previous quarter.

“GDP has shrunk by 0.1% in the second quarter. The situation in the fourth quarter is still promising, because rising wages and falling inflation will not only boost real income, but also boost consumption, thereby supporting domestic demand,” he added.

Germany was once a model of European economic growth, but now it is likened to Europe's “sick man” by economists.

“The German economy continues to struggle for momentum, heightening concerns about structural headwinds and not just cyclical growth,” JPMorgan euro zone economist Greg Fuzici said in a report on Friday titled “Examining the German Patient.” Concerns about sexual resistance.

“It is of course easy to list the many challenges: China's growth and competition, rising energy prices, the green transition, the transformation of the automotive industry, the aging population and the backlog of investment in public infrastructure,” he said. The tripartite coalition government is unable to deal with these challenges. “The impact of this gained confidence”.

In France, a new government led by Prime Minister Michel Barnier has just been formed after an inconclusive snap election earlier this year led to months of political uncertainty.

However, the veteran Tory and former Brexit negotiator has inherited something of a poisonous chalice as the country faces serious fiscal challenges that require immediate attention.

Analysts including Quantum Strategies president David Roach believe a Barnier-led government is unlikely to last more than a year, putting much-needed economic and budget reforms on the back burner.

“This will lead to a worsening of France's fiscal deficit and debt. France will defy the EU on excessive deficit procedures. Political paralysis has now seized France and Germany by the throat,” Roach said.

“The RN and the Liberals will wait until the first anniversary of the legislative election – the earliest date on which a new legislative election can legally be held – before overturning the Barnier hodgepodge.”

He added that no reforms would be made during this period. “Remain short French government bonds, even if it requires patience,” Roche advises.

The far-right also poses a threat in Germany, where the Alternative for Germany party performed well in recent state elections and where immigration, integration and economic recession became the focus of public discontent.

Chancellor Olaf Scholz's center-left Social Democrats (SPD) narrowly retained power in their home state of Brandenburg in this weekend's local elections, narrowly keeping the Alternative for Germany out of the race.

Given the far-right's sharp rise in popularity among some German voters, the AfD's defeat could have significant consequences for Germany's leadership. The far-right party won its first state election in Thuringia earlier this month and narrowly came in second in another vote in Saxony.