Europe May Not Avoid Recession Even If US Does: Macquarie By Investing.com

While a recession remains a possibility for the US, Europe “continues to avoid one and is therefore in a more susceptible situation,” Macquarie analysts noted in a note on Tuesday.

Europe’s economic fragility has been largely overlooked in recent weeks due to a lack of meaningful European and UK data, focus on a potential US slowdown and the Federal Reserve’s response and the European Central Bank’s (ECB) decision to don’t sound the alarm about the eurozone. growth. These factors have allowed the euro (EUR) to rally since late July, according to Macquarie.

However, fresh concerns emerged on Tuesday, with Germany’s final Q2 GDP report showing a contraction of 0.1%, compared with a 0.1% increase in Q1. The data challenged earlier optimism, as analysts had hoped that the rise in euro area composite PMI through May, along with the rise in Germany’s services PMI, would allow the country to avoid negative growth and settle near 0.0%.

Meanwhile, private consumption in Germany was weaker than expected, falling 0.2% quarterly after a revised 0.3% rise in Q1. That trend, combined with a drop in GfK’s consumer confidence index since September, signals “a lack of recovery in Q3,” analysts noted.

They believe pressure from China’s supply challenges may be contributing to lower consumer confidence in both France and Germany.

In addition, analysts also point to political uncertainty, particularly in Germany, as another factor dampening consumer sentiment. According to polls for the upcoming state elections in Thuringia, the far-right party Alternative for Germany (AfD) leads with around 30%, ahead of the Christian Democratic Union (CDU), the Socialists (SPD) and the Greens.

However, the results in Thuringia could come as a negative surprise to EUR watchers next week, as they are often receptive to political developments that highlight growing polarization in Europe.

Overall, Macquarie’s team believes that politics and economic growth continue to be the “soft underbelly” of the euro, with the currency’s stability largely supported by an ECB that remains reluctant to take a more accommodative stance, unlike the Fed, due to continuing concerns about persistent wage growth in Europe.

Despite this, they see the euro as fragile and particularly vulnerable to disinflationary data or developments.

“Should there be further signs that wage growth is retreating or that inflation is easing in the Eurozone, it could return to the 1.08-1.10 range again,” the analysts continued.