European Economy on the Brink of Recession
Europe’s manufacturing Purchasing Manager Index (PMI) was placed at 45.7 in September, the lowest level since October 2012, reports Business Insider. This data suggests that Europe is approaching a recession. PMI is an economic indicator of the health of the economy based on a survey of managers and their expectations for each sector. Numbers below 50 imply economic contraction.
HIS Markit, a global information provider, explained that the German economy, Brexit, and the impact of US-China trade tensions decreased industrial confidence in Europe. It is likely that Europe would suffer even more if the United States imposes limits on American investments in China, reports CNBC.
Constantine Fraser, European political analyst, stated that investment limits could decrease the value of the Chinese Yuan even more, meaning that there will be a lower demand from China and other countries for European products. This lower demand would hurt Europe, as the continent’s economy relies heavily on exports.
Moreover, the German economy is another concerning factor for Europe. According to Reuters, the country’s manufacturing recession worsened in September. Some factories recorded the lowest production levels since the last global financial crisis. As such, German economic institutes decreased their economic growth forecasts for 2019 and 2020.
Manufacturing is deeply connected across the globe, so it is influenced by trade tensions and weaker economies, says The Wall Street Journal. Jason Thomas, head of global research and managing director at the Carlyle Group, highlighted that the production of most products no longer take place in just one country. Consequently, every major economy is hurt when manufacturing activities contract in one country.
The possibility of a no-deal Brexit could deepen concern for the European economy, reports Bloomberg. The UK is scheduled to leave the European Union at the end of October, and it is likely that in the worst-case scenario, the United Kingdom and the rest of Europe would enter into a recession. The Bank of England estimated that without a deal, Brexit could cost the UK 5.5% of its gross domestic product, enough to push Europe into a recession.
Additionally, the value of the euro continues to fall, says The Wall Street Journal. With trade tensions, many investors look for safe assets, such as the U.S. dollar. Salman Ahmed, chief investment strategist at Lombard Odier IM, states that it is even possible for the euro to reach the same value of the U.S. dollar. He also stressed the need to change fiscal policy in order to avoid the use of aggressive monetary policy in the future due to a recession.
Nonetheless, some parts of Europe still have a bright outlook. The French National Institute of Statistics and Economic Studies left unchanged its growth forecast of 1.3 percent, reports Euronews. The French economy added 166,000 jobs in the first half of 2019 and the low inflation rate, combined with tax cuts, gave consumers a higher disposable income.
Given these conditions, the new president of the European Central Bank, Christine Lagarde, is pushing governments to embrace pro-growth policies, according to The Guardian. In the past, Europe lowered interest rates to counter economic concerns. Although this restrained the debt crisis, it did not promote economic growth. Due to the vast number of factors in this issue, there is no telling what a clear solution would be.