A domino recession scenario from the north to the south of the EU gains weight after the latest economic data, due to the suffocating rise in prices month after month, the end of the era of minimum interest rates, which has been raising financing costs to businesses and families, and by the disruption and overall uncertainty posed by the Russian invasion of Ukraine, specifically on energy and industrial raw materials.
As autumn approaches, during which it is feared that the EU will suffer from gas shortages and that oil will continue to soar, the probability of a contraction in activity in the coming quarters increases, although the end of the pandemic maintains the recovery fund. An economic reconstruction after the COVID shock favored by historical plans and stimulinow followed by the shock measures in response to the war and the energy crisis, and which 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.
In this risk of recession and domino effect, Germany is the most fragile partner, for various reasons, such as its greater dependence on Russian gas or the more advanced cycle of its recovery from the COVID-19 crisis. Meanwhile, Spain appears as the last chip that would fall before the first full tourist season since 2019. But it also already offers worrying wounds, and, inevitably, it will suffer from the weakness of Europe's economic locomotives. As the economic vice president, Nadia Calviño, said this week, "curves are coming."
One of these alarms was the first reduction in activity in the industry of our country in July since January 2021. The main leading indicator of the manufacturing sector, the PMI index calculated by S&P Global, entered the field last month in which it warns of a "considerable drop" in orders, "at a time of strong inflationary pressures and widespread economic uncertainty," according to the analysis center. This contraction extends to the entire EU, with particular severity in Germany. That is the origin of the requests for solidarity with energy saving measures, and with the threat that in an extreme context the industry will have to stop if they fail.
"The manufacturing sector experienced the largest drop in new orders in more than two years in July," explains S&P Global in the report that accompanies the publication of the July data, referring to our country. “Companies surveyed reported that sales have plummeted due to an increasingly uncertain environment,” he continues.
“The high prices and the persistence of the problems in the supply chains also affected the demand”, it affects. One of the sub-indices of the survey focuses on supplier delivery times and shows some improvement after very difficult months due to what are known as bottlenecks at a global level, although it remains in negative territory (below 50 points) and the experts agree that "improvement" responds in part to lower demand.
The other recent warning in Spain about the risk of recession has been the first job destruction in a month of July after months of strong growth and records of indefinite. In any case, our country was one of the largest in the EU that grew the most in the second quarter: 1.1%, according to the advance data compared to the first quarter of this year. Germany's economy stagnated, with a GDP variation of 0% between April and June, and France's barely grew 0.5%. Italy was close to our country, with 1%.
"It should be noted that German GDP growth in the first quarter was revised upwards from 0.2% to 0.8%, so the decline from previous data is not as severe as it seems," Azad Zangana highlights. , economist for Europe of the manager Schroders. "It appears that rising inflation is reducing household demand [en el resto de la UE], which is hurting growth. But if prices continue to rise, could this be the last solid growth figure for the eurozone?
On the contrary, "the greater dynamism [en España] came mainly from the strong reactivation of private consumption (increase of 3.2% quarter-on-quarter) after the drop registered in the previous quarter (−2.0%), weighed down by the sixth wave of COVID, the outbreak of the war and the carrier strike. Likewise, the increase in income from tourism (+29.3%) stands out positively, which already exceeds the level of the same quarter of 2019 by 8%. The most negative aspect is the contraction in investment in machinery (−6, 9%), which has been negatively affected by the increase in uncertainty and supply problems", observes Javier García Arenas, an economist at Caixabank Research.
"The notable growth of GDP in the second quarter constitutes support for GDP to exceed 4% in 2022 as a whole, despite the fact that the outlook for the second part of the year is being overshadowed by the rise in inflation, the energy crisis, the rises in interest rates and the worsening of confidence indicators," he adds.
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, like the government, AIReF or the Bank of Spain. However, the growth of activity below 3% in 2023 moves away from the objective of recovering GDP pre-COVID to 2024. And these expectations do not exclude the probability of a technical recession (two consecutive quarters of GDP decline), like the one the United States is already suffering.
"Germany or Italy are expected to have growth of less than 1% next year, an annual rate that suggests the possibility of one or several quarters of recession," says Chris Iggo, expert at Axa Investment Managers.
Spain has in this summer's tourist season, the first with only a few death rattles from the COVID restrictions since 2019, a source of differential growth compared to the economies of northern Europe. In fact, the PMI index for the services sector for the month of July, published this Wednesday, continued to point to an expansion in activity, unlike in industry, despite inflation and other uncertainties.
Similarly, AIReF's real-time GDP growth forecast (an algorithm that is updated with the data that is published during the quarter) currently points to growth of 0.6% between July and September , compared to the second quarter.
“Spain's service sector performed positively in July, with activity expanding at a solid pace, supported by higher levels of new orders and new job creation. Despite that, it's hard not to be a little worried about economic growth in the coming months, as a close look at the survey data revealed some issues this month," said Paul Smith, chief economic officer at S&P Global Market Intelligence. As the uptick in activity related to the easing of pandemic restrictions continues to fade, businesses surveyed reported growing customer indecision due to rising inflation and fears of an economic downturn. .
To the energy and inflation crisis, and precisely as a response to the latter, is added the tightening of financing conditions, after years of cheap credit, which is causing the decision of the European Central Bank (ECB) to raise interest rates of reference with which banks lend money or vary the price of mortgages. An increase in prices that supposes a brake on activity, which is precisely the objective sought by the institution chaired by Christine Lagarde to stop fueling price increases, even though the risk of causing a recession increases and the rise in rates has no effect on gas or oil, which depend on geopolitical issues.
This same Wednesday, the Organization of Petroleum Exporting Countries (OPEC) and other countries such as Russia decided to increase oil production by 100,000 barrels per day from September. The decision initially boosted the price of a barrel of Brent oil slightly, although futures later fell back below 100 dollars. But they remain at unusually high levels. On the other hand, the uncertainties about a total cut off of Russian gas consumed by the EU, after shipments have already been drastically reduced in recent weeks.
Meanwhile, the Bank of Spain is already signaling a tightening of financing conditions in our country. "The average costs of new loans granted to households and companies have risen slightly in recent months, in line with the start of the normalization of monetary policy [del BCE]", he notes.
In the same vein, "the criteria for approving loans to families and non-financial companies have tightened moderately in the first half of the year", and the forecasts "point to a contraction in the supply of credit to SMEs in the coming months. For its part, the demand for credit is weak, especially from SMEs". "On the other hand, requests for loans for home purchase would have continued to grow," according to the agency, despite the fact that mortgages are also rising.