Is euro zone heading towards stagflation?

European Central Bank (ECB) policymakers would probably prefer a sharp economic sting – in the form a full-fledged recession across the euro area – and a complete vanquishing of inflationary forces. Instead we’re getting stuttering, anaemic growth but also the persistence of inflation in the services sector linked to wage growth.

Frankfurt’s very gradual lifting of interest rates probably won’t come in time to stop the bloc slowing further, with Germany likely to enter another technical recession with two quarters in a row of contraction. That’s according to HCOB’s preliminary composite euro zone purchasing managers’ index (PMI), compiled by S&P Global, which sank to 48.9 this month from August’s 51, below the 50 mark that separates growth from contraction. The composite index tracks the services and manufacturing sectors, which dominate most economies, and provide an early indicator of the direction of travel.

The latest down shift came courtesy of a further decline in Germany, Europe’s largest economy, led by manufacturing in the economy’s automotive industry. Volkswagen is considering closing factories in Germany for the first time and laying off thousands of staff in an attempt to cut costs as the industry shifts to electric motoring. Volkswagen’s travails are seen as a read on the car industry in general. The second pull on the pmi was the French economy which contracted after an Olympics boost in August.

“A technical recession (in Germany) seems to be baked in,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, forecasting Germany’s economy would shrink by 0.2 per cent this quarter. He also claimed the euro zone was heading towards stagnation. A period characterised by low growth and high inflation.

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