Updated September 27, 2023 ~ The Eurozone is likely to experience a major recession over the next year led by a weak German economy. The Eurozone economy has stalled over the last year ending in June with quarterly growth of only .3% and .6% year over year. In 2023, however, the ECB raised rates another 2% and shrank the monetary base by over 900 billion euros or 14%, which is the largest tightening of monetary policy in the history of the Eurozone. Since monetary policy acts with a lag of 6-12 months, in our view, the most likely case is that the Eurozone would enter into a recession in the 4th quarter of 2023.
Recent economic data indicates that the Eurozone is in fact entering into a major recession.
German GDP growth was flat in the second quarter but down .6% Y/Y.
German industrial production and retail sales both plunged in July by .8% for the month which is an almost 10% annualized decline.
Factory orders plunged by 11.7% in July and are down 10.5% year-over-year.
The housing sector is in free fall with prices down 9.5% over the last year and apartment building permits for July down by over 31% vs. last year.
Unemployment rose 18,000 in August vs. expectations of a 10,000 loss and the prior month was revised upward from a 4,000 decline in unemployment to a 1,000 job loss.
Finally, the composite PMI, which is a critical leading economic indicator, plummeted with the most recent reading at 46.2 with a reading below 50 indicating a contraction.
We are forecasting that the German economy will shrink by .5% this quarter which is a 2% annualized rate with a decline in investment and lower net exports driving the decline.
Germany represents 30% of the Eurozone GDP, but most other Eurozone economies are also weakening. For example, French retail sales in August were down over 4% year-over-year, and September’s PMI fell sharply to 43.5 from 46 in August. In addition, the Italian economy shrank by .4% in the 2nd quarter, industrial production declined by .7% in July and the composite PMI was 48.2 in August. 45% of Eurozone mortgages are floating rates vs. only 6% in the US. Recent ECB rate increases will, therefore, likely significantly reduce consumer spending. Germany, France, and Italy account for 66% of Eurozone GDP, with weakness in these countries likely to spread to the rest of the Eurozone. We expect the entire Eurozone to enter a recession over the next year with GDP likely to decline by 1-2% as weakness in Germany spreads and the impact of the unprecedented ECB tightening filters through to the other Eurozone economies with a lag.
We expect global interest rates to peak this year and decline next year as the ECB is likely to be forced to cut rates in the first half of 2024. We believe that the recent sharp sell-off in long-term bonds is due to extremely tight global monetary policy with the Global Monetary Base declining by almost 3% over the last two months (Global Monetary Base data can be accessed on our website). We forecast that the US 10-year bond yield is likely to fall into the 3-3.5% range in 2024 as global growth drops and the Global Monetary Base increases. We still believe the US economy is likely to stay out of a recession however as investment in housing, infrastructure, and technology proves resilient even in the face of very high interest rates.