Increased risk of recession in Europe in the second half, says Macquarie By Investing.com

There is a growing risk of a recession in Europe in the second half of 2024, driven by weak economic data and entrenched structural problems in core economies such as Germany, Macquarie strategists said on Monday.

Flash purchasing managers’ indices (PMIs) showed the economic slowdown deepening, with both the services and manufacturing sectors under pressure. Germany’s services PMI, for example, fell to 50.6 in September from 51.6 in August, while the eurozone composite PMI fell below 50, signaling a contraction.

Macquarie points out that these weak indicators come at a time when Europe is facing greater structural headwinds.

“There is an elevated risk of recession or very slow growth in central Europe in H2 as structural impediments to growth continue to overlay what is happening in the global cycle,” the note said.

While the US continues to outperform, thanks to its ongoing easing cycle, Europe’s weaknesses weigh heavily on its outlook.

Germany, Europe’s largest economy, is particularly vulnerable. According to Macquarie, the country “continues to suffer from a breakdown in its original post-1990 ‘business model'”, which relied heavily on cheap energy from Russia and a strong export market in China.

These pillars collapsed and Germany was slow to adapt. Its underinvestment in electric vehicle (EV) production now leaves it behind international competitors such as the US and China, further diminishing its industrial output.

In addition, political polarization in Germany is increasing. The recent regional elections in Brandenburg saw strong results for the far-right Alternative for Germany (AfD), highlighting the shift of the electorate to the political extremes. Macquarie warns that this could lead to a vicious cycle of political and economic instability.

“If the electorate is already moving to political extremes, then imagine what will happen to political polarization in the next global recession,” the firm says.

Amid such risks, Macquarie warns that traders may increasingly short the euro, especially as the European Central Bank’s policy response remains uncertain.