A number of business surveys conducted throughout the Eurozone have shown that business activity has unexpectedly tapered off. This came as a shock to the global financial community, which was hoping that the Eurozone would be able to avoid the chance of slipping into a new recession. Those hopes are now lost and it appears there is no chance to avoid an economic contraction. Many economists were afraid that the situation in the Eurozone was beginning to deteriorate, but none of them predicted business to decline as much as it did this past month.
The biggest concern is that Germany and France are getting hit particularly hard. These two countries have been the linchpin of the movement to save the Eurozone from disaster. Any economic stagnation on their part creates worries for the state of the entire global economy. Both countries appear to be cutting jobs as they move deeper into crisis. Reuters polled closed to 50 economists over their insights on the future of the France and Germany’s economies. Many economists stated they were pessimistic, but none of them predicted the outcome would be as bad as it was.
The purchasing managers indexes have declined below 50, a sign that manufacturing is contracting. Business surveys have confirmed that the economy has been contracting over the past two quarters. According to all available data, the economy has contracted about 0.1% over the past quarter. Although this is a lower contraction than the previous, projections call for a 0.5% drop in GDP over the next year.
Weakness in the manufacturing sector is the most concerning. Without improvement there, any hopes for an economic rebound are lost.
Additional concerns are the austerity measures that have been implemented in Italy, Spain and Greece. Without support from government spending, these areas are going to have a harder time stimulating activity in the private sectors.
The biggest shock was that the Eurozone’s economy was looking at its best expansion ever last year. However, that was largely due to many of the monetary policies initiated by the ECB. The central bank has created more than a trillion euros in stimulus, but that has clearly failed to keep the Eurozone from falling into a new recession.
World stocks have fallen significantly on this news. Another concern is that China’s GDP has declined as well, but that fails to compare to the concerns arising from the situation in the Eurozone.