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The timing of a recession is difficult to predict, but one thing is certain: the potential for downside to Europe's future economic growth is real, writes Osama Rizvi .
advertisementRising rents, mortgages and energy prices have created a difficult economic situation for people living in the euro area, where wages barely cover basic necessities. It certainly feels like a recession, but is it really?
The International Monetary Fund (IMF) says that although there is no formal definition of a recession, there is a general understanding that the term refers to a period of slowing economic growth.
However, we economists and analysts typically define a recession as two consecutive quarters of negative growth.
For example, the euro area economy contracted by 0.1% between January and March 2023, after also contracting in the last three months of 2022. This means the euro area has fallen into recession.
The National Bureau of Economic Research (NBER), on the other hand, has a more comprehensive definition, one that we can relate to. A recession is an economy-wide decline that involves a significant decline in economic growth and is widespread in all or most sectors of the economy. It's been a few months. This is easy to see for European consumers and businesses, and we can agree that the region may already be battling this problem.
Is Europe in recession? This is what the indicators show
A good place to start is by looking at the level of business activity in the economy. One useful indicator in this regard is his HCOB Composite Purchasing Managers Index, which measures business conditions using a variety of indicators such as new orders, employment, sales prices, and purchasing activity.
According to the latest statistics for the euro area, the PMI index recorded 47.1 in November. A number below 50 indicates economic contraction, while a value above 50 indicates economic expansion. The Manufacturing PMI Production Index shows manufacturing activity has been below 50 for eight straight months, with the latest reading at 44.3.
Another indicator of economic health is bank lending activity. More loans being disbursed means people are confident in the economic prospects of a country or region and are engaging in more business activity. The decline in the number of loans suggests otherwise.
In Europe, corporate lending fell by 0.3% in October 2023 compared to October 2022, the first annual decline since 2015. Similarly, rising loan default rates are another measure of tracking a country's growth. Unfortunately, stress over loan defaults appears to be increasing in Europe.
Recently, the European Union lowered its growth forecast for the eurozone economy from 0.8% to 0.6%. The decline in growth prospects, or seemingly meager growth rates, is emblematic of the overall challenges facing the world in general and Europe in particular.
Rising interest rates, persistently high energy prices, and a highly volatile global economy are adding to these concerns. Indeed, various bank estimates suggest that rising interest rates could wipe out 1% of the euro zone's gross domestic product.
What will the future hold?
Due to recent geopolitical tensions, energy prices are expected to continue rising next year. Inflation has eased slightly, but remains well above the five-year moving average.
The IMF's latest economic update predicts a slight recovery in the euro area in 2024, with GDP growth expected to average 1.5%. However, this is based on certain assumptions, most importantly that oil and gas prices will remain stable, and the ongoing geopolitical conflicts do not guarantee this. .
Wells Fargo said in a recent report that a eurozone recession is “increasingly likely, but not yet inevitable.” They do not expect a rate cut, one of the most important indicators and factors in this discussion, to occur until June 2024.
On the consumer side, there are no encouraging trends in consumption at the moment, with retail sales also declining.
Mario Draghi, the former head of the ECB, most recently echoed this concern, and the head of the Belgian central bank agreed that “the risks are tilted to the downside when it comes to the eurozone.”
Other factors and indicators are also of concern. The slowdown in business activity in the euro area has recently “accelerated” due to weak demand in the services sector, with new orders PMI at its lowest level in 11 years, or since September 2012.
According to manufacturing activity, new orders are at their sharpest rate of decline since 1997. Some analysts say that while the eurozone may be able to avoid a full-blown recession, it will still face some “mild downturns”.
advertisementThis is very similar to what many refer to as the “soft recession” in the United States.
Overall, the timing of a recession is difficult to predict, but one thing is certain: the potential for downside to Europe's future economic growth is real. At the same time, numerous indicators point to a recession in the United States, the world's largest economy.
Osama Rizvi is an economics and energy analyst focused on commodities, macroeconomics, geopolitics, and climate change.
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