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For markets, the spirit of the US economy is captured by jobs data and stock prices. In the UK, it is house prices. To see into the soul of German industry, which drives continental Europe’s economies, they watch industry sales.
This week, the mood has suddenly turned grim. Precipitous falls in August – the biggest since 2009 for exports, industrial orders and production – raised fears that growth in Europe’s largest economy had gone into reverse. As the data were released, the International Monetary Fund in Washington warned of a 40 per cent chance of another eurozone recession. Germany’s Dax index has fallen 9 per cent in three weeks, eurozone stocks by 7 per cent.
The change in psyche explains much of this month’s malaise across global markets. In the first half of 2014, global investors bet on the eurozone recovering gradually from the traumas of the region’s debt crisis. Capital repatriation also pushed the euro higher. With growth now disappointing and deflation dangers rising, some investors are fleeing. Western European equity funds tracked by EPFR, the funds data provider, have seen outflows in 12 of the past 13 weeks.
The dramatic re-characterisation of continental Europe’s recovery story into something much darker has implications beyond near neighbours, such as the UK. This is not a re-emergence of the 2012 crisis, when the eurozone came close to break-up. Instead, the continent’s “Japan-ification” – sluggish growth and falling prices – could act as a drag on the world economy for years. At least as worrying, the continent’s weaknesses may reflect imbalances akin to those blamed for the global crises that erupted from 2007.