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Will manufacturing finally get out of contraction?

Will We See Recession in the Eurozone Soon, With Manufacturing in Contraction?

Posted Monday, October 3, 2022 by
Skerdian Meta • 2 min read

Will manufacturing finally get out of contraction?

Manufacturing was slowing in the Eurozone since February when the conflict in Ukraine started, but it fell into contraction in August, dragging European manufacturing down too, as energy prices continued to increase. This will weigh further on the German and Eurozone economy, with the Deutsche Bank forecasting a 3.5% recession for Germany next year, as demand for nearly all products falls. Germany’s BDI says the energy crisis is likely to be more severe for manufacturing than COVID.

The German government has tried to avoid getting caught on the energy crisis. State officials recently announced a €65bn relief package funded by a windfall tax on electricity producers to help soften the costs. The package offers one-off payments to help households with energy bills.

It also includes an extension of the €5bn aid package for energy-intensive companies, first introduced in July. In August, chancellor Olaf Scholz also announced a cut in the value-added tax on gas sales from 19% to 7%. But, I don’t think that will stop the recession as manufacturing and services activity remains in contraction, which will probably get worse as we head into winter.

German Final Manufacturing Report for September

September manufacturing PMI 47.8 points vs Forecast of 48.3 points
August manufacturing was 48.3 points

German manufacturing activity contracted for a third month in a row in September, hurt by a deepening downturn in new orders as the soaring cost of energy set off alarm bells about the outlook for business, a survey showed on Monday.

Phil Smith, Economics Associate Director at S&P Global Market Intelligence, said “the soaring cost of energy, which has already led some businesses to cut production, caused alarm bells, with manufacturers’ expectations for future output having plummeted in September following the shutdown of the Nord Stream 1 pipeline.”

“If demand continues falling in the months ahead as businesses are expecting, the pass-through of higher costs will inevitably become more and more difficult, thereby squeezing margins.”