Market Analysis

According to Macquarie strategists, the risk of a recession in Europe is increasing in the second half of 2024, fueled by weak economic data and persistent structural challenges in key economies like Germany.

Recent flash purchasing managers' indexes (PMIs) indicate a deepening economic slowdown, with both the services and manufacturing sectors facing significant pressure. For instance, Germany’s services PMI dropped to 50.6 in September from 51.6 in August, while the Eurozone composite PMI fell below 50, signaling contraction.

Macquarie highlights that these troubling indicators come at a time when Europe is contending with larger structural issues. Their report states, “There’s an increased risk of recession or very slow growth in core Europe in H2, as the structural barriers to growth continue to overlap with the global economic cycle.”

While the US economy is performing better due to its ongoing easing measures, Europe’s weaknesses are severely impacting its outlook.

Germany, as Europe’s largest economy, is particularly susceptible. Macquarie notes that the country is "struggling with the collapse of its original 'business model' from the post-1990 era," which relied heavily on affordable energy from Russia and a robust export market in China.

With these foundational supports eroded, Germany has been slow to adapt, particularly in the electric vehicle (EV) sector, where underinvestment has left it trailing behind global competitors like the US and China, consequently diminishing its industrial output.

Additionally, political polarization is increasing in Germany. The recent regional election in Brandenburg saw a strong performance by the far-right Alternative for Germany (AfD), reflecting a shift among voters toward political extremes. Macquarie cautions that this trend could result in a harmful cycle of political and economic instability.

“If the electorate is already moving towards the political extremes, consider the implications of political polarization during the next global recession,” the firm warns.

In light of these risks, Macquarie suggests that traders may increasingly discount the euro, especially as the European Central Bank's policy response remains uncertain.

Paraphrasing text from "Investing" all rights reserved by the original author.