The main indices of business climate (PMI indices of purchasing managers, IFO) for the euro area in October, as well as factory orders for Germany, combined suggest a further decline in activity in the fourth quarter of this year, similar to the expected decline of 0.1-0.2 percent in the third quarter, writes the chief economist of the Croatian Employers’ Association (HUP) Hrvoje Stojić in the Weekly Focus.
The most reliable business barometer for the euro area – PMI index for the services sector has again sharply fallen by almost one percentage point to 47.8 points, marking the fifth consecutive time below the level of 50 points, which historically indicates a recession. At the same time, the PMI index for the manufacturing industry has dropped to 43.0 points, indicating a stronger industrial recession. All of the above points to an increase in negative risks to GDP growth in the second half of the year.
Namely, the manufacturing industry is increasingly struggling under the burden of weak global demand and impaired competitiveness, due to the higher costs of securing key energy sources, as well as the strengthening of the euro to the detriment of corporate competitiveness. The recent collapse of new orders also suggests a strong decline in construction activities. The IFO survey reveals uncertainty regarding the delivery of key energy sources and climate policies.
Moreover, the cumulative increase in interest rates of 450 basis points, along with the additional rise in rates and the weakening of fiscal stimulus over time, is weakening domestic demand, which cannot be offset even by a significant recovery in exports. Over the last 50 years in Germany, every cycle of rising interest rates has regularly led to a recession with an average lag of two to three quarters from the beginning of the rate hikes to the onset of recession.
