Somewhat surprisingly, the Eurozone’s worst performers are Germany and France, whose results suggest they are now the main drags on industry in the common currency area. More precisely, the French index closed last month at 46.2 points and the German index at 41.9.
It is therefore in the south of the Old Continent that the pillar of European industry is found. This concerns more precisely Spain and Italy, whose indices have improved slightly, while remaining above 50 points in both cases. Spain finished at 51.4, its highest level in 20 months, and Italy closed March at 50.4. But the most surprising case is that of Greece, whose PMI index stood at 56.9.
The S&P report notes that, despite the contraction, the European secondary sector showed “further signs of positive dynamism”, with production and new orders remaining on upward trajectories. Production stood at 47.1, compared to 46.6 in February, and orders and delivery times shortened significantly.
At the same time, business confidence reached “its highest level in almost a year, but growth forecasts remained relatively weak”, according to the report. All this had a significant impact on employment in factories.
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Hamburg Commercial Bank’s chief economist, Cyrus de la Rubia, said in the analysis that it’s all “a bit discouraging.” According to him, the manufacturing sector in the euro zone is “normally running at full capacity”, in reference to the four major economies of the common currency: Germany, France, Italy and Spain. “Together they represent three-quarters of the Eurozone’s manufacturing industry. But of course the situation we are experiencing now “is unusual” because “two cylinders, Germany and France, are more or less out of service”.
On the other hand, Spain and Italy seem to be the engines of European industry, but Mr. De la Rubia is very clear: “So far, this is not enough for the euro zone as a whole to return to normal. path to growth. We can only expect a lasting economic recovery when all the cylinders are back in motion.”
The move to the next stage “has therefore not yet materialized, largely due to the underperformance of German and French industries”. The manufacturing sector is therefore expected to remain in recession for several months, which will weigh on growth in the euro zone this quarter, which will also remain in recession territory.
In the specific case of Spain, S&P notes in its report that production increased at its highest rate in a year, while orders increased for the second consecutive month in a context of external demand which shows signs of firmness. This has led Spanish companies to increase their purchasing volumes and hire more staff.
“If we look at manufacturing and the PMI, our real-time GDP estimate calculates a solid growth rate of 1% in the first quarter, a figure the eurozone can only dream of,” notes Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
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Seized engines
France and Germany are mired in a crisis at all levels, and until they recover, the economies of the eurozone and the European Union will remain at half-speed. The Ifo institute itself has declared the German economy “sick.” In its spring forecast, it revised down the growth of Europe’s locomotive. More precisely, to 0.1%. The federal government of Olaf Scholz has also revised its forecasts downwards, but to 0.2%. Finance Minister Robert Habeck himself declared that the outlook was “terribly bad”. For its part, France has several problems to solve in its economy. The budget situation is completely out of control, with a deficit in its accounts of 154 billion euros, which represents 5.5% of its economy. The debt, meanwhile, exceeds 110.6% of GDP. The decline in government revenues and the contraction in spending are at the root of this accounting disorder. The chief economist for France and Switzerland at ING Economics, Charlotte Montpellier, said that France “will be among the countries with the worst budgetary situation in the EU”.
In addition, growth forecasts for France have been revised downwards by all international organizations, while the government still hopes for GDP growth of 1.4%. But the French Institute of Statistics and Economic Studies (INSEE) itself expects zero growth in the first quarter and the second quarter closing at 0.3%. “This would lead to a knock-on effect of 0.5% in the middle of the year,” predicts the ING expert. Therefore, achieving 1% growth at the end of the year would imply “average quarterly growth of 0.8% in the third and fourth quarters, which seems very unlikely.”
Overall, experts expect the situation to improve “in the second half”, although everything will depend on the evolution of the geopolitical situation and the tension in supply chains. At the same time, Germany must reform its tax rules to make its industry more competitive.