The European Central Bank’s economic projections look increasingly over-optimistic, with a vast array of indicators pointing to a potential double-dip downturn in the common currency area by the end of the year. Support to growth from lower energy prices has faded, housing prices are negative or falling in most core economies, corporate insolvencies are creeping higher as earnings weaken, and S&P’s euro area composite purchasing manager index slipped back into contractionary territory in June.
Further weakness beckons: Exports to both of the euro area’s largest markets – China and the United States – are looking vulnerable as the global manufacturing cycle slows, and fiscal consolidation could exert additional drag in 2024, when the European Commission expects governments to reduce support measures by roughly 0.8 percent of gross domestic product.
With the European Central Bank working to keep intra-euro spreads restrained, the typical signs of financial stress – like a surge in Italian bond yields – have been somewhat obscured. But the gap between 2-year and 10-year German bond yields is holding near a 31-year low as investors brace for a deceleration, lending surveys are pointing to a deterioration, and euro area financial conditions have worsened at an alarming pace over the last year
Financial conditions indices