And then things moved fast. Business confidence fell to worrying levels in July, making a recession, especially in Europe, seem inevitable.
The S&P Global Flash Composite (Manufacturing + Services) PMI for Germany fell to 48.0. Well below the “magic” level of 50, seen by many as the line between economic growth and contraction - even though the actual level of negative GDP growth is considerably lower. The Manufacturing PMI also fell to 49.2.
In the United States, the picture is not much better. The Composite PMI fell even more sharply and stood at 47.5. Here, the Manufacturing PMI held up better, but nevertheless fell to 52.3.
Ifo collapse
The German IFO index - the most important indicator for German industry and the economy - was even worse. The index fell to 88.6, a level last seen in the first months of the corona crisis and invariably followed by a recession. That IFO index indicates a year-on-year contraction of the German economy of more than 5 percent.
The IFO sub-index for expectations looks even bleaker and points to a year-on-year GDP contraction of 10 percent! And while it normally doesn’t come to that - often realised growth doesn’t follow the Ifo expectations index all the way down - we shouldn’t rule it out.
German companies are bracing themselves for the coming winter, when the likelihood of a complete cut-off of gas supplies from Russia will steadily increase. The German Bundesbank estimates that in such a scenario 3.25 percent of economic growth would be lost between now and the second quarter of 2023. Mind you, that is on top of the recession we are already heading into.
A nasty recession
The latest figures on business confidence confirm that it is not a question of if but when the recession will come. If it comes sooner than expected, it will be a tricky situation. With the sharp rise in government debts due to corona and the increasing likelihood that failing energy companies will have to be nationalised, there is little incentive for governments to stimulate their way out of recession.
Not to mention Italy’s capabilities. And the ECB, which has only just raised interest rates for the first time and is light years behind the curve, will have a hard time getting the printing press back on. This could give the recession a nasty edge and have repercussions on the financial markets.
Jeroen Blokland is founder of True Insights, a platform that offers independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every Monday on Investment Officer Luxembourg.
This article originally appeared on InvestmentOfficer.nl.