Confidence over the outlook for Europe’s economy continued to deteriorate during August amid mounting concerns over Germany’s prospects. The country’s economy contracted during the three months to June, shrinking on a quarterly basis by 0.1%.
- Business confidence in Germany fell to its lowest level since November 2012
- The ECB is expected to implement further monetary loosening
- Italy formed a new coalition government
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Confidence over the outlook for Europe’s economy continued to deteriorate during August amid mounting concerns over Germany’s prospects. The country’s economy contracted during the three months to June, shrinking on a quarterly basis by 0.1%. Growth was dented by a slowdown in export activity. Although Germany’s economy expanded by 0.4% year on year, exports dropped by 0.8%, registering their largest decline for six years.
“Germany is still a “two-speed economy” (IHS Markit)
Business confidence in Germany fell to its lowest level since November 2012 during August, according to the Ifo Institute, which warned of “ever more indications” of a possible recession in Europe’s largest economy. Industrial companies have not exhibited such high levels of pessimism since the “crisis year” of 2009; meanwhile, the business climate in the services sector has also weakened.
Germany’s industrial production dropped sharply in June, falling at a monthly rate of 1.5%. Germany is still a “two-speed economy” in which service growth is just managing to offset sustained manufacturing weakness, according to IHS Markit, which considers a third-quarter contraction in the country’s economy to be a possibility. During August, the benchmark Dax Index fell by 2%, while France’s CAC 40 Index declined by 0.7%
Minutes from July’s meeting of European Central Bank (ECB) policymakers reported that a discussion between central bank officials about the possibility of redefining the ECB’s longstanding inflation target of “below but close to 2% in the medium term”. Policymakers had considered extending the target to encompass both the lower and upper sides of 2%. The eurozone’s rate of inflation has remained stubbornly low and remained unchanged at 1% during August, according to early estimates. The ECB is widely expected to loosen monetary policy further in coming months in order to address deflationary pressures in the region.
Economic growth in the eurozone continued to weaken during July as a solid contribution from the services sector proved insufficient to offset a marked drop in manufacturing production during July. Activity picked up slightly in August but remained generally subdued, dampened by a weak manufacturing sector.
Italy’s coalition government collapsed during August, resulting in a new coalition being formed between Democratic Party and the Five Star Movement – formerly longstanding rivals from different sides of the political spectrum. Prime Minister Giuseppe Conte resigned in August, but will now return to the role with the new coalition.
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