While a recession remains a possibility in the United States, Europe “continues to narrowly avoid recession and is therefore more vulnerable,” Macquarie analysts said in a report on Tuesday.
The fragility of the European economy has been largely ignored in recent weeks due to a lack of key European and UK data, focus on a potential US slowdown and the Federal Reserve's response, and the European Central Bank's (ECB) decision not to sound the alarm about euro zone growth. These factors have led the euro (EUR) to rise since late July, according to Macquarie.
However, fresh concerns emerged on Tuesday when Germany's final second-quarter GDP report showed a 0.1% contraction, down from 0.1% growth in the first quarter. The data called into question earlier optimism as analysts had hoped that an upturn in the euro zone composite PMI through May and an increase in the German services PMI would help Germany avoid negative growth and settle near 0.0%.
Meanwhile, private consumption in Germany was weaker than expected, declining 0.2% quarter-on-quarter after a revised 0.3% increase in the first quarter. This trend, combined with a decline in the GfK consumer confidence index for September, points to a “lack of recovery in the third quarter,” analysts said.
They believe pressures from supply problems in China may be contributing to declining consumer confidence in both France and Germany.
Analysts also say political uncertainty, particularly in Germany, is dampening consumer sentiment. Opinion polls for upcoming state elections in Thuringia show the far-right Alternative for Germany (AfD) party leading with about 30% support, ahead of the mainstream Christian Democratic Union (CDU), Socialist Party (SPD) and the Green Party.
Still, Thuringia's results could pose a negative surprise for euro watchers next week, as they often respond to political developments that highlight growing polarization within Europe.
Overall, Macquarie's team believes that politics and economic growth remain the euro's “weak spot”, with the euro's stability being primarily supported by the ECB, which, unlike the Fed, has been hesitant to take a more dovish stance due to ongoing concerns about high wage growth in Europe.
Nevertheless, they believe the euro is vulnerable and particularly susceptible to disinflationary data and trends.
“Any new signs of slowing wage growth or easing inflation in the euro area could see it fall again to the 1.08-1.10 range,” the analysts continued.
