Germany leads as Europe slides towards recession amid supply shortages

Europeans returning from their summer breaks will find a more fragile economy that risks buckling under the threats of energy rationing, record inflation and tighter monetary policy.

Purchasing managers’ indexes due Tuesday will likely show private-sector output shrinking for a second month, adding to signs that a recession in the 19-nation euro zone is now more likely than not. Business confidence gauges from Germany, France and Italy will probably confirm that direction.

Germany, Europe’s largest economy, has emerged as the region’s weak spot, with its outsized industrial base suffering disproportionately from surging energy costs and a persistent shortage of supplies. Meanwhile, services aren’t seeing the same kind of tourism boom that’s tiding over countries around the Mediterranean as vacation travel picks up post-Covid. 

An update on Germany’s second-quarter performance on Thursday will reveal whether the negligible contraction initially reported, small enough to be rounded away, will be revised into a bigger one, or whether consumer spending was strong enough to avert a decline in output — for now.

Data in the coming week will be key ingredients for discussions on where monetary policy is headed after the European Central Bank raised rates by half a point in July and signaled “further normalization” in September without pre-committing on the size. The ECB’s next meeting is less than three weeks away, and most policy makers have yet to express their preferences.

An account of the July meeting due on Thursday may offer some insight, and about half of the ECB’s 25 rate setters — including Executive Board member Isabel Schnabel and Bundesbank chief Joachim Nagel — will get a chance to share their views during the Kansas City Fed’s annual Economic Policy Symposium in Jackson Hole, Wyoming. 

ECB President Christine Lagarde won’t make the trip to the Grand Tetons this year. But her comments following the July decision, along with another pickup in inflation to just under 9 per cent and expectations that price pressures will increase further, suggest she’s leaning toward a bigger move: “We have to bring inflation down to 2 per cent in the medium-term,” she said. “It’s time to deliver.”

“Minutes from the ECB’s July 21 meeting may offer clues on whether investors should brace for another 50-basis-point rate hike in September. Given widespread inflationary pressures, a large increase is our base case.”

Central bankers from around the world are also headed to Jackson Hole, with Federal Reserve Chair Jerome Powell scheduled to speak on Friday. Before that, Chinese banks will likely trim their benchmark loan prime rates for the first time in months, while monetary policy authorities in Israel, Iceland, South Korea and Botswana are among those expected to hike rates. 

Elsewhere in western Europe, it’s a fairly quiet week, with UK PMI readings scheduled for Tuesday. 

In the east, data due on Wednesday will likely show that Russian industrial production slumped in July at the fastest rate since the start of President Vladimir Putin’s war in Ukraine, as energy output falls amid a standoff with the rest of the continent.

Iceland’s central bank is expected to raise its key rate by 75 basis points to 5.5 per cent, keeping it ahead of developed-nation peers in tightening as a housing boom there keeps fueling price growth.