Falling industrial production brings recession closer in the Eurozone. Goldman Sachs expects ECB rate cuts from 4% to 2.25% in 2024

European industry is showing signs of further decline, exacerbating concerns about the economy, on which the full effect of the ECB tightening will weigh in the coming months. According to data published yesterday, industrial production in Germany fell by 0.4 per cent in October (-3.5 per cent year-on-year), to its lowest level since August 2020. The figure surprised analysts, who had expected a 0.2 per cent recovery.

"The German industrial sector is suffering from a combination of high energy prices, weak foreign demand and less favourable financing conditions," Commerzbank noted. The decline in industrial production is in line with expectations of a further contraction (and thus recession) in the German economy in the fourth quarter. "In light of the low business confidence and weak orders at the moment, there is little indication of a quick turnaround, at least for industry," Commerzbank added.

German data

Also for Capital Economics, the fifth consecutive monthly fall in output suggests that 'industry will again be a drag on economic activity in the fourth quarter and contribute to Germany falling into a technical recession'. Hsbc noted that German production in energy-intensive sectors fell 'to its lowest level since reunification' and that 'the downward trend in industry is likely to continue into 2024'.

Germany will thus be a drag on the Eurozone. The entire area, after a GDP contraction of 0.1% in the third quarter, could end up in recession in the fourth quarter. For five quarters, the European economy has been at a standstill, while the US economy has grown more than expected. Industrial production data were also weak in October in France (-0.3%) and Italy (-0.2% monthly, -1.1% year-on-year according to Istat data).

Outlook for Germany

For Germany in particular, there are no reasons for optimism on the horizon, but on the contrary reasons for a possible worsening of the economy. The government is in trouble after the German Constitutional Court's rejection of plans to transfer 60 billion in spending from the Covid fund to the climate fund: the manoeuvre was judged to be an attempt to circumvent the 'debt brake' that prevents a structural deficit above 0.35 per cent of GDP. The SPD and the Greens would like to save the climate resources but Liberal Finance Minister Christian Lindner, who is in trouble in the elections, opposes a new exception to the debt brake. Germany is in danger of having to cut investment despite the large fiscal space and the need for economic renewal.

ECB monetary tightening backfires on hawks

Demand from abroad is also expected to fall in the wake of the slowdown in the US and China. In addition, Germany, like the other Eurozone countries, will pay the bill for the ECB monetary tightening wanted by the German hawks in the Governing Council, despite falling inflation. In recent days Isabel Schnabel, a member of the ECB executive board, has started to change course and has not ruled out rate cuts in the first half of 2024, after having long pointed out the existence of an allegedly difficult 'last mile' on inflation (denied by the data). Bundesbank President Joachim Nagel has in recent days continued to emphasise upside risks for inflation and even hinted at new rate hikes. Schnabel and Nagel insist on further restriction by stopping the reinvestment of Pepp securities.

Goldman Sachs' expectations

But now the ECB tightening is proving to be too much for Germany and the Eurozone. The markets discount very significant rate cuts starting in March, totalling 1.5% in 2024. After Bnp Paribas and Deutsche Bank, Goldman Sachs also indicated a first cut in April (with risks on March), followed by cuts of 0.25 % at all other meetings in 2024. Thus deposit rates would fall from the current 4% to 2.25% in early 2025.

(Translated with Deepl)

• Original version: Cade l’industria europea, recessione più vicina. Goldman Sachs: tagli dei tassi sui depositi Bce dal 4% al 2,25% nel 2024