Business activity in Germany falls in August to a low of June 2020, at the time of leaving the Great Confinement, according to the composite PMI index, which includes the industrial and services sectors, and which has been in contraction territory since July due to the blow of inflation and the risk of a definitive cut of the gas imported from Russia.
The Bank of Spain rules out a recession “in the immediate horizon”
The indicator calculated by S&P Global anticipates a recession in the eurozone’s economic locomotive with surveys conducted between the 12th and 19th of this month. Below 50 points indicates a drop in business activity. And this same reading came out this Tuesday in France, also in August, and in the eurozone as a whole.
“The data paints a bleak picture of the German economy, showing a deepening drop in business activity,” acknowledges Phil Smith, associate chief economic officer at S&P Global Market Intelligence.
“Positively, August data provided evidence of further relaxation of both supply-side constraints [de los cuellos de botella] as well as cost increases, which helped lift business confidence from the recent low in July. However, with the threat of an energy crisis still looming, the outlook remains fraught with uncertainty,” he continues.
Coinciding with this warning of recession in Germany and throughout the eurozone, the euro sinks to its lowest point in 2002 when it crosses the dollar, below parity, that is, the 1:1 exchange rate. As of February 7 , just a couple of weeks before the start of the Russian invasion of Ukraine, the common currency exchanged for $1.15. It is now worth less than the US currency. Something unprecedented in 20 years.
In gross, if bank commissions or the evolution of prices in this period are not taken into account, the citizens, companies and states of the eurozone have become more expensive for the goods and services they buy in dollars, as is the case of oil , about 15%. How much the euro has depreciated.
The fall of the euro is even greater from the 1.23 dollars at which it was exchanged at the beginning of 2021, of almost 20%. It has lost a fifth of its measured value against the greenback.
The consequences of this depreciation are numerous, some positive and others negative. It adds to economic growth in the sense that the large economies of the eurozone, such as Germany or France, are purely exporters (they sell more abroad than they buy), and their goods and services become more competitive, as they become cheaper due to the fall in the currency. without having to lower salaries (or not raise them) or reduce costs in order to offer the same at a lower price (by the way, an impossible task in these times of abrasive inflation).
However, it also remains, and much in a crisis precisely of price and energy increases, by making what is imported more expensive, which is especially crucial for countries like Spain, whose largest item of everything it acquires in dollars is oil. . But it’s not just crude. The depreciation of the own currency supposes an extra inflation in general because it raises the costs of the industry, as occurs with the majority of raw materials, which are traded in dollars (also gas, with which electricity is generated, for which the Government has put a cap on our country together with Portugal), and ends up moving at all prices, already out of control.
Recession in Spain?
“We do not see a recession in Spain on the immediate horizon, far from it. We are going to grow 4% this year and by 2023 rates are expected to be around 2%, point up, point down,” said Margarita Delgado, deputy governor of the Bank of Spain, in an interview with the magazine ‘Telva’ in recent days.
The institution enters with an optimistic vision in the debate on the risk of a contraction in economic activity since the last part of this 2022, which has been exacerbated during the summer by the suffocating rise in prices month after month, the end of the era of minimum interest rates, which has been raising financing costs for companies and families, and due to the disturbance and general uncertainty caused by the Russian invasion of Ukraine, specifically regarding energy and industrial raw materials.
For now, the data supports this optimism. Our country almost doubled the economic growth of the eurozone in the second quarter, according to figures confirmed by Eurostat last week.
The exit of the pandemic maintains the bottom of the economic recovery, with Spain experiencing its first ‘complete’ summer since 2019, without restrictions. A reconstruction after the COVID shock favored by historical plans and stimuli, now continued by shock measures in response to the war and the energy crisis. And that is based mainly on the explosion of demand with the end of the restrictions, the good moment of the labor market and public and private investments.
The latest downward revision of the European Commission’s forecasts coincide with this analysis and maintain Spain as the country, among the largest in the EU, that will grow the most in 2022 and 2023, and are similar to those of the main national institutions, such as the Government, AIReF or the Bank of Spain. However, the growth of activity below 3% in 2023 moves away from the objective of recovering the pre-COVID GDP until 2024.
“Of course, there is no such thing as zero risk”, clarifies Margarita Delgado in the interview published by ‘Telva’. “The uncertainty is there, we cannot rule out that some quarter is not entirely positive, that the potential closure of the supply of Russian gas to Europe, fundamentally to Germany, could have a negative impact on economic growth,” she explains.
“Spain has a better starting point because it is not expected that there will be an energy shortage. Europe depends on Russian gas, some countries more than others, such as Germany or even Italy. But for better or worse we live in a global world. And although our exposure as a country to the Russian economy is very small, beyond some commercial elements, the rise in the price of energy means that all inputs end up on the rise, which is why inflation is rising in Spain as well”, explains the deputy governor of the Bank of Spain.