In the heart of summer, the stock markets shook. In early August, the US Department of Labor published a report showing that the employment market slowed more than expected in July. The reaction of the world’s stock markets was not long in coming, prices fell sharply, against a backdrop of fears of a recession in the United States. Although the storm now seems to have passed, it could resurface.
Mathieu Savary, an economist at BCA Research and a specialist in the Eurozone, predicts that Europe will enter a recession in early 2025. He details his forecasts for L’Express. His reasoning is based in particular on the case of Sweden, which he considers to be a perfect barometer of the health of the European economy.
L’Express: What state is the European economy in today?
Mathieu Savary: It is in a transition phase. It is still benefiting from some positive factors from the beginning of the year, such as the rebound in global industrial activity, which is favourable to Europe and the eurozone in particular, which devotes a significant proportion of its GDP and employment to foreign trade, as well as to the manufacturing sector. From a domestic perspective, there have also been benefits linked to the fact that households have a lot of excess savings and have seen their real incomes [NDLR : hors inflation] to increase at a rate of 2.3% year-on-year. This is a big change from 2023.
Will this good run continue?
No, there are much more negative forces on the horizon. This improvement in the global industrial cycle seems to be ending. We are already seeing new orders in Germany and Japan slowing down and even contracting. In addition, global liquidity is starting to deteriorate following the turbulence on international markets related to the “carry trade” strategy that took place in early August. In Europe, wage increases are slowing down. Employment trends suggest that this will continue. Investment intentions of firms are very depressed at present.
Do you deduce that Europe could enter recession in 2025?
There is even a probability for the end of this year, but our central scenario leans more towards the beginning of 2025, given that the global economy is showing significant signs of deterioration, in particular its locomotive, the United States, whose situation is very worrying. Excess household savings have disappeared there, while American fiscal policy has tightened. In addition, investment intentions and activity in the real estate sector have collapsed. As for hiring intentions, they are declining.
The probability of a recession in the United States is very high, which will create a significant shock for the eurozone. We believe that China, a major trading partner of Europe, will not be able to save the situation. Europe continues to face deflation. When an economy is so indebted and real estate is doing very badly, the probability of it reaccelerating is very low. We also see a lot of problems emerging in emerging markets where liquidity is lacking and growth is slowing.
The fate of the European economy is closely linked to that of its American counterpart?
There are several reasons for this. The first vector is European exports to the United States. This is a major market for European companies, their profits are obviously very influenced by American nominal growth. However, there is now a risk of a decline in corporate results. Furthermore, a recession in the United States is often accompanied by financial shocks: stock prices fall, credit spreads widen, the US dollar tends to rebound… All in all, this creates a very significant tightening of global financial conditions. However, European markets are highly correlated to Wall Street.
What room for maneuver will the European Central Bank have?
We are entering this window where the negative impact of previous monetary tightening is at its peak. A recession in itself is usually the catalyst for a rate-cutting strategy. It has already started and will accelerate at the end of the year and then continue into 2025. We expect the recession to be short and not particularly severe. That is really when monetary policy works best to recreate a strong recovery. You need this synchronization where literally all central banks are easing monetary conditions.
What could be the consequences of this recession, even if it turns out to be small?
We can expect an increase in deficits. But this will not necessarily have repercussions on the bond market, knowing that during a recession, the private sector tries to increase its savings as a precaution. Moreover, central banks themselves, in a recessionary context, generally tend to lower rates, which simplifies the financing of public deficits.
In this regard, how do you judge the situation in France and its budget?
In the event of a recession, both the European Union and the markets will have a much higher tolerance for an increase in public deficits. But if France continues to increase its public deficit while the economy is doing well, the markets’ tolerance will be completely different. Following the dissolution of Parliament in June, the interest rate differentials between France and Germany have widened considerably. There is already a significant risk premium imputed to French assets linked to the political environment and fiscal policy.
To justify your recession forecast, you take the Swedish economy as an example. For what reasons?
Sweden has been a very good barometer of Europe for a very long time. It has a small and very open economy. Exports and imports make up a very large, even disproportionate, proportion of Sweden’s gross domestic product. This makes the country very sensitive to the evolution of the global industrial cycle. Furthermore, it mainly exports intermediate goods and capital, which are historically the first categories to react, because they are upstream in the supply chains. Sweden tends to move a little faster than the global economy, and in particular Europe, because it is very integrated into European supply chains. But new international domestic orders are collapsing in Sweden, which is generally a very bad signal for the economy of the continent.
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