France and Germany are at the center of the eurozone’s economic troubles. Business surveys show their weak performances have become a major drag on the region.
The rest of the eurozone is seeing growth, but it’s not enough to offset the problems caused by these two economies.
Private-sector activity across the eurozone’s 20 countries dropped again in October, following a similar decline in September, according to a report by Hamburg Commercial Bank and S&P Global.
The latest Composite Purchasing Managers’ Index (PMI) rose slightly to 49.7 in October, just above September’s 49.6, but still below 50.
Anything under 50 means contraction. France and Germany were responsible for much of this weakness, while other countries saw their best growth in months.
ECB cuts rates as economy falters
The European Central Bank (ECB) has been struggling badly. Last week, it slashed interest rates for the second consecutive meeting in an attempt to ignite growth. Inflation cooled to 1.7% in September, dropping below the ECB’s 2% target.
The International Monetary Fund (IMF) isn’t optimistic either. It just downgraded its forecast for the eurozone’s growth, predicting both 2024 and 2025 will be weaker than initially expected.
Germany, historically the eurozone’s economic engine, has been grinding to a halt. Its manufacturing sector is dealing with sky-high energy costs, increasing competition from China, and a shortage of workers.
The country’s economy is forecasted to stagnate both last and this year. France, the eurozone’s second-largest economy, isn’t expected to improve anytime soon either.
New data might push the ECB into more aggressive action, possibly slashing rates again to stimulate growth.
Bank of Italy Governor Fabio Panetta shares this sentiment when he said the ECB might need to cut rates further, this time to boost the economy instead of simply taming inflation.
PMI data points to more challenges ahead
The latest PMI data also supports the idea that the ECB could cut rates again when they meet in December. But just how deep these cuts will be remains uncertain, as more data is still expected before the year ends.
The signs aren’t looking good. The weakening economy raises concerns that the eurozone might not have a “soft landing” from the recent surge in inflation sparked by Russia’s invasion of Ukraine.
Still, ECB Chief Economist Philip Lane claims that while the recovery isn’t going as planned, things haven’t hit rock bottom. New orders have been dropping for five months straight. Companies are cutting jobs for the third consecutive month, and they’re doing so at the fastest pace since 2020.
Inflation is easing, but businesses are charging higher prices at the slowest rate since February 2021. It’s hard to find anything positive in these numbers.
The situation becomes even clearer when you look at the broader economy. The eurozone’s GDP grew just 0.2% in the second quarter, less than initially estimated. This is a slowdown from the first quarter, and the eurozone is being outpaced by other major economies like the U.S. and the UK.
The U.S. economy grew at a blistering annual rate of 3%, while the eurozone managed just 0.8%. Consumer spending and investment are down, signaling that high interest rates are taking their toll on demand. Exports and government spending are the only things keeping growth alive.
Ireland, typically known for its sharp economic growth thanks to being a hub for U.S. pharmaceutical giants, saw a large contraction in the second quarter.
The figures initially showed Ireland growing, but new data revealed a different story. Ireland has been a wild card for the eurozone in recent years, frequently causing revisions in economic data.
