Warnings of Sharp Declines from US, Germany, UK, and France... Indicators Show "Eurozone Already in Recession"

[Asia Economy New York=Special Correspondent Joselgina] The simultaneous deterioration of indicators showing business conditions of major countries such as the United States, Europe, and Japan suggests that corporate sentiment has begun to freeze due to persistent high inflation and monetary tightening. The tightening of money supply by central banks around the world to curb inflation is ultimately leading to a deterioration of the real economy. In particular, the Eurozone, which is facing a crisis phase due to the Russia-induced energy crisis, is already receiving warnings that it has entered a recession.

◇ Warning Signs Across the US, Germany, UK, France, and Japan

The S&P Global Composite Purchasing Managers' Index (PMI), which reflects business trends, has recently shown a clear slowdown centered on the United States and the Eurozone.

According to S&P Global on the 23rd (local time), the composite PMI of the United States, the world's largest economy, recorded a decline for five consecutive months until August. The total drop during this period reached 12.7 points. Looking at the details, a sharp contraction is particularly confirmed in the service sector. The service PMI is 44.1, the lowest in 2 years and 3 months. The manufacturing PMI is 51.3, above the baseline of 50 that separates expansion from contraction, but the prevailing view is that it will soon return to contraction.

The warning signals in the Eurozone have also deepened. The Eurozone composite PMI released on the same day also slipped for four consecutive months. The manufacturing PMI (49.7) has already entered contraction territory, and the service PMI (50.2) is precariously hovering around the baseline.

By country, Germany, the largest economy in Europe, confirmed the sharpest contraction in corporate activity since June 2020. France also turned downward for the first time since the pandemic. Andrew Harker, an economist at S&P Global, diagnosed, "(The Eurozone indicators) suggest economic contraction in the third quarter" and "economic weakness is becoming widespread."

The UK's August composite PMI, released together, continued the expansion phase at 50.9 but recorded the lowest level since February 2021, when COVID-19 lockdowns peaked, casting a shadow over future prospects. Japan's composite PMI (48.9), released the day before, also indicated contraction. China is also hampered in corporate activities by COVID-19 lockdown policies and a real estate market slump.

The Wall Street Journal (WSJ) reported, "Corporate activities in the US, Europe, and Japan all declined in August," adding, "High inflation, material shortages and delivery delays due to supply chain disruptions, and interest rate hikes have all contributed to the contraction of corporate activities."

◇ Layered Adverse Factors... Direct Hit to the Real Economy

The sharply cooled corporate sentiment is also confirmed in recent earnings announcements.

The majority of companies that announced second-quarter earnings diagnosed that cost burdens are increasing due to rising raw material prices, transportation costs, and wage increases. Companies that lowered future earnings guidance or announced workforce restructuring followed one after another. On the same day, US department store chain Macy's lowered its annual earnings outlook.

The adverse factors that have persisted since early this year show no signs of resolution even as the second half progresses. Due to soaring inflation, energy and food prices have surged, sharply deteriorating household consumption power. Also, supply chain disruptions that have continued since the pandemic show no signs of improvement, and geopolitical risks including the Russia-Ukraine war remain. The fact that monetary tightening by central banks, including the Federal Reserve (Fed), continues amid persistent inflation also casts a shadow over future economic prospects.

In particular, pessimism is high in Europe, which is heavily dependent on Russia for energy. Barclays warned that the Eurozone will experience negative growth in the fourth quarter of this year and the first quarter of next year, undergoing a mild recession, but considering uncertainties related to energy supply, this outlook may be optimistic. Goldman Sachs has already predicted that the Eurozone has entered a recession. JP Morgan Chase forecasts that the recession will begin by the end of this year and continue into next year.

This content was produced with the assistance of AI translation services.