Compared with the United States, the challenges facing the European economy are more severe. With weak economic growth, the ongoing conflict between Russia and Ukraine, and rising trade protectionism, the eurozone economy was once on the verge of stagflation.
According to data from the European Statistical Office, the eurozone's harmonized CPI grew by 0.2% month-on-month in August, higher than 0 in July. The harmonized CPI in August grew by 2.2% year-on-year, lower than 2.6% in July. But after excluding food and energy, the core harmonized CPI in August grew by 2.8% year-on-year, lower than 2.9% in July, but at a relatively high level.
Worse, as a sharp increase in workers' wages pushed up the inflation rate, the eurozone service industry inflation rate rose to 4.2% in August, the highest level since October last year. The service industry inflation rate has been hovering around 4% for nearly a year, compared with 4.0% in July.
The other side of high inflation and high interest rates is a weak economy. On September 6, the European Statistical Office released the final value of the eurozone's second-quarter GDP. In the second quarter, the eurozone's GDP grew by 0.2% month-on-month, lower than the initial value and the expected 0.3%; it grew by 0.6% year-on-year, in line with expectations. In the first quarter of this year, the eurozone's GDP grew by 0.3% month-on-month and 0.5% year-on-year. Dragged down by the manufacturing industry, Germany's GDP declined in the second quarter, which is also the key reason for the eurozone's economic weakness.
In line with this, data released by S&P Global and Hamburg Commercial Bank (HCOB) showed that the eurozone's initial manufacturing PMI in August was 45.6, lower than 45.8 in July, a new low in 8 months; the service industry PMI was 53.3, higher than 51.9 in July. Germany, the "European economic locomotive", performed even worse, with a manufacturing PMI of 42.1 in August, lower than the expected 43.3; and a service industry PMI of 51.4, also lower than the expected 52.3.
In the view of experts, Europe is in a difficult situation, and the eurozone economy is weaker than the United States. If there is a push for fiscal policy, the situation in Europe will certainly be completely different. Europe did not adopt a very expansionary fiscal policy during the pandemic like the United States did, and this must be taken into account when comparing the situation in Europe and the United States.
In addition, the impact of the Russia-Ukraine conflict cannot be ignored, which has suppressed European economic growth. The United States is not as heavily dependent on Russia for energy as Europe. If the Russia-Ukraine conflict and the Palestinian-Israeli conflict can be resolved, the situation in Europe will be completely different, which will have a huge impact on the economy, sentiment, investment decisions, etc.
Although the situation in Europe is serious, it should not be assumed that a recession is coming. The European Commission, the European Central Bank and international financial institutions generally predict that the eurozone economy will grow slowly this year, but will improve slightly in the future, and GDP may grow by 1.5% next year. Depression factors have not yet taken the lead, but Europe still has a lot of hard work to do, including innovation and structural reforms, which are extremely important in Europe today.
As the "locomotive" of the European economy, Germany's current economy is not only flashing red lights, but is also likely to fall into a recession crisis. A series of economic data released recently show that the current German economy is in poor condition. Data show that the final value of Germany's manufacturing PMI in August was 42.4, a further decline from the final value of 43.2 in July, and it has always been in the contraction range. Compared with the manufacturing industry, the performance of the German service industry is relatively good. The final value of the German service industry PMI in August was 51.2, which was above the 50 boom-bust line, but lower than the final value of 52.5 in July.
In addition, Germany's IFO business climate index in September was 85.4, continuing to decline, lower than the previous value of 86.6. Data released by the German ZEW Economic Research Institute showed that the German ZEW economic climate index in September fell sharply from 19.2 in August to 3.6, a decline far exceeding expectations, and the assessment of the German economic situation continued to deteriorate.
In its autumn economic forecast report released in September, the German Ifo Institute for Economic Research pointed out that the German economy will still be in crisis due to cyclical and structural factors. In a statement, the Ifo Institute for Economic Research said that after the economy shrank by 0.3% last year, Germany's inflation-adjusted GDP is expected to stagnate this year. Compared with the summer economic forecast, the Ifo Institute for Economic Research lowered Germany's growth forecast for this year by 0.4 percentage points, and Germany's economic growth will stagnate. In addition, Germany's economic growth forecast for 2025 was also lowered by 0.6 percentage points.
According to the latest monthly report released by the German Central Bank in September, the German economy is expected to continue to be weak. From the current situation, Germany's real gross domestic product (GDP) in the third quarter of 2024 may stagnate or even decline again. However, economists at the German Central Bank do not expect Germany to experience a significant, widespread and sustained decline in economic output at present.
Specifically, weak domestic demand in Germany has dragged down industrial production. Germany's industrial sector and construction industry performed poorly in output in the third quarter. The monthly report pointed out that increasing economic policy uncertainty is putting pressure on companies. In addition, higher financing costs have suppressed demand for industrial products and construction projects. In addition, although demand for German industrial products has increased, this is not enough to offset the impact of insufficient overall industrial orders.
In terms of the labor market, the monthly report shows that the lack of economic stimulus measures is gradually affecting the development and prospects of the labor market in Germany. Despite the high level of employment in Germany, employment growth has slowed down recently. Total seasonally adjusted employment increased by just 4,000 in July, and the unemployment rate remained at 6.0% in August. Overall, however, the outlook for Germany's current labor market remains relatively stable.
The European Central Bank has already begun to cut interest rates, and overall inflation in the eurozone is falling. Specifically, Germany's Harmonized Consumer Price Index (HICP) rose 2% year-on-year in August, a significant drop from 2.6% in July. However, the Bundesbank said in its monthly report that it expects inflation to rise again in Germany in the coming months. Germany's inflation rate in September is likely to remain at a similarly low level as in August, but is expected to rise slowly again thereafter.
Why has the German economy become what it is today?
(1) The German economy is too dependent on exports, which is a big problem. Many Germans cannot afford the products they produce. Due to the cost of living crisis, many people are trying to get rid of "unnecessary" expenses, which may also have an impact on the German economy.What is the Cheapest place to rent in Germany
(2) At a time when countries are striving to become self-reliant, Germany's excessive focus on exports will hurt itself if it cannot find new markets for its products and services. China is also a huge market, but its standards are experiencing slow growth, and Germany has not benefited from the tense relationship between China and the United States.
(3) Germany messed up a lot of things during Merkel's administration, with cheap energy, crazy exports, and no real threat to any strategic industry.
(4) Germany ignored the big problem of 100% dependence on cheap Russian natural gas and completely ignored the trend of electric vehicles.
(5) Germany cannot promote economic growth by investing in infrastructure or other areas because of the so-called debt ceiling in their constitution. Germany has become one of the most resistant to innovation in Europe.
Now Germany needs to innovate again and invest heavily in new technologies. It's time to make changes!
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