The US economy is heading for a soft landing. The euro area continues to face many uncertainties. This is particularly true for the industrial sector. “After a promising start to 2024, the euro area has experienced another slump in the industrial sector. The outlook is not very optimistic, as the decline in the Purchasing Managers’ Index (PMI) shows.”
explains Dagmar Koch, Country Manager Coface Austria. China, meanwhile, is struggling to maintain its growth. Nevertheless, the credit and risk management expert Coface has mainly adjusted its risk assessment upwards for five countries: the only improvement in country risk in Albania, Cyprus, Rwanda and Costa Rica is offset by the devaluation of Israel.
As Europe’s leading industrial location, Germany is still particularly hard hit by increased energy costs and low demand; production in the manufacturing sector in July 2024 was still 12 percent below the pre-pandemic level. Private consumption is being slowed by the persistently high savings rate and increased political uncertainty. “The situation in Germany also has a significant impact on Austria, as the two economies are traditionally closely linked.”
comments Koch. “Austria is in a phase of recession, albeit a moderate one. After a decline of 0.8 percent compared to the previous year last year, the economy will also shrink this year. Only in the coming year 2025 will there be a moderate increase in economic activity of 1, 0 percent to be expected”
explains Christiane von Berg Head of Economic Research BeNeLux & DACH at Coface and continues: “The inflation rate fell below the ECB target of 2 percent in Austria in the fall. Even with the planned wage increase in January, the inflation rate should remain below the target value and, together with the planned strong wage growth, should result in higher purchasing power for private households.”
High unit labor costs put companies under pressure
However, what helps private consumption puts companies under pressure. In general, many companies in the euro area are still suffering from a sharp increase in unit labor costs of 4.2 percent in the second quarter of 2024 compared to the previous year, which is reducing their profit margins. “After peaking in all euro area countries in the first half of 2023, margins have fallen by almost 2 percentage points in Germany and the Netherlands and by double in Spain and Italy. This puts many companies under pressure, as the increase in bankruptcies in recent months shows.”
explains Christiane von Berg.
From the monetary policy to the fiscal policy turnaround?
The first interest rate cuts by the Fed and ECB in 2024 mark the beginning of the expected slight monetary easing. While monetary policy will be less restrictive next year, tighter fiscal policy should have a negative impact on growth in some countries, particularly in the euro area. In July 2024, the European Commission opened an excessive deficit procedure against seven countries, including France, Italy, Hungary and Poland. “The affected countries have been obliged to implement tough austerity measures, which means that there will be no further growth impulses. “After a meager increase of 1.0 percent this year compared to the previous year, growth in the euro area should only be slightly stronger next year at 1.3 percent.”
says Christiane von Berg. Compared to other European countries, no significant austerity measures should be introduced in Austria, although the debt ratio of around 77 percent of GDP is above the Maastricht criterion of 60 percent for debt. The reason for this is the budget deficit, which is likely to be below the Maastricht limit of 3 percent. “However, the exact financial plan will only become apparent once a new government coalition has been sworn in.”
emphasizes Koch. The prospects for insolvency, on the other hand, look bleaker. There were 3,300 corporate bankruptcies in the first half of 2024. This is an increase of 27 percent compared to the same period last year. If the second half of the year turns out to be similar, the number of bankruptcies would almost reach the high of 2009.
USA facing a decisive election
In both Europe and the US, the third quarter of 2024 brought good news regarding a decline in inflation, due, among other things, to falling commodity prices, especially petroleum products. The US economy continues to be resilient, as evidenced by the economic rebound in the second quarter, after a short-term weakness in the first quarter of 2024 – even if the momentum in the labor market is gradually weakening. The US presidential elections will have an impact far beyond the United States. Domestically, Kamala Harris is committed to price regulation and a reduction in housing costs, while Donald Trump is aiming for massive tax cuts and a boost in energy production.
China with slowing growth
Despite the government’s announced support measures, Chinese economic growth continues to slow – burdened by a crisis in the real estate market as well as sluggish domestic demand and continued subdued external demand. In a further attempt to meet the government’s 5 percent growth target, the People’s Bank of China (PBoC) announced additional support measures in late September. These include even deeper interest rate cuts and a reduction in the reserve requirement ratio for banks to bring more liquidity into the market.
The entire study and further graphics can be downloaded: www.coface.at
+++In our Coface webinar on November 5th, 2024, Christiane von Berg Head of Economic Research BeNeLux & DACH explains the results of the study. To register!+++
COFACE: FOR TRADE
Coface has been one of the world’s leading credit and risk management companies for more than 75 years, helping companies navigate and grow in an uncertain and dynamic environment. Regardless of size, location or industry, Coface offers its 100,000 customers in around 200 markets comprehensive solutions: trade credit insurance, business information, debt collection, protection for project transactions. Every day we use our unique expertise and cutting-edge technology to support trade – both domestically and in export markets. In 2023, Coface employed around 4,900 people and achieved sales of 1.87 billion euros.