Europe slips towards recession as ECB mulls steps ahead

Europeans returning from their summer breaks will find a more fragile economy that risks buckling under the threats of energy rationing, record inflation and tighter monetary policy.

Purchasing managers’ indexes due Tuesday will probably show private-sector output shrinking for a second month, adding to signs that a recession in the 19-nation euro zone is now more probably than not. Business confidence gauges from Germany, France and Italy will probably confirm that direction.

Germany, Europe’s largest economy, has emerged as the region’s weak spot, with its large industrial base suffering disproportionately from surging energy costs and a persistent shortage of supplies. Meanwhile, services aren’t seeing the same kind of tourism boom that’s tiding over countries around the Mediterranean as vacation travel picks up post-Covid.

An update on Germany’s second-quarter performance on Thursday will reveal whether the negligible contraction initially reported, small enough to be rounded away, will be revised into a bigger one, or whether consumer spending was strong enough to avert a decline in output for now.

Data in the coming week will be key ingredients for discussions on where monetary policy is headed after the European Central Bank raised rates by half a point in July and signalled “further normalisation in September without pre-committing on the size. The ECB’s next meeting is less than three weeks away, and most policymakers have yet to express their preferences.

An account of the July meeting due on Thursday may offer some insight, and about half of the ECB’s 25 rate setters — including Executive Board member Isabel Schnabel and Bundesbank chief Joachim Nagel — will get a chance to share their views during the Kansas City Fed’s annual Economic Policy Symposium in Jackson Hole, Wyoming.

ECB President Christine Lagarde won’t make the trip to the Grand Tetons this year. But her comments following the July decision, along with another pickup in inflation to just under 9 per cent and expectations that price pressures will increase further, suggest she’s leaning toward a bigger move: “We have to bring inflation down to 2 per cent in the medium-term, she said. “It’s time to deliver.”

All eyes will be on Jackson Hole on Friday for US Federal Reserve chairman Jay Powell’s speech.

His remarks on the economic outlook are expected to reaffirm the US central bank’s resolve to keep raising rates to curb decades-high inflation, though he’s not probably to specify to how big officials will go when they meet in September.

Policy makers raised rates by 75 basis points in July for the second straight meeting and have said that a similar hike could be on the table again - or potentially a smaller, half-point move - depending on the data. - Reporting by Bloomberg