Three of Europe's largest economies are probably in recession – and the ECB is totally out of bounds

Reuters / Jason Cairnduff

• Three of Europe's largest economies – Germany, Italy and the UK – are either in a recession or are on the verge of it, which could spell danger to the eurozone.
• Germany, Europe's industrial spine, stuttering. Unemployment has risen for the second time in three months.
• The UK economy contracted for the first time since 201[ads1]2, when production fell 0.2% in April to June.
• Italy's debt crisis is only exacerbated by political uncertainty.
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Europe may be in the midst of a crisis, as three of the largest economies are on the tank at the same time. The European Central Bank looks like it is running out of bullets to shoot up the economy.

What happened?

Germany is Europe's largest economy. Germany relies heavily on foreign exports, which means it is a victim of curbing global trade from the China-US trade war.

On Wednesday, Germany reported that industrial production fell 1.5% month on month. According to Oxford Economics, "all major sectors, except construction, fell during the month as tensions in trade continued to affect the sector."

In the second quarter, industrial output fell by 1.9% for the quarter, which economists say is "the largest quarterly decline since 2012."

"Our German GDP indicator now points to a contraction in the second quarter, "As factory orders decline, it's called.

It has an impact on jobs. HSBC chief economist Stefan Schilbe wrote in a recent note that unemployment had risen in July, the second increase in three months. The decline, as Schilbe put it, is beginning to "leave a (modest) mark on the labor market."

Oxford Economics / Gardens Analytics

The UK is not doing much better. [19659018] The UK economy contracted for the first time since 2012 in Q2, a clear sign of the effects of the "no-deal" uncertainty Brexit has on the UK economy.

" Trust in the UK's health economy got a sparkling blow this morning," said Lukman Otunuga, senior research analyst at FXTM. Friday.

Business investment has fallen in five of the last six quarters.

"The economy has been provided instead by the government and households," Ranko Berich, head of market analysis at Monex Europe, said in a statement Friday. " This is a purely unsustainable situation for the economy, and highlights the extent to which Brexit has already taken a considerable toll."

The pound fell 0.4% against the US dollar on the news.

"Today's disappointing GDP figures are set to raise alarm bells over Brexit that are dragging the UK economy deeper into the abyss. This unfavorable scenario could cause the Bank of England to cut interest rates faster than expected, in an attempt to revive it British economy, ”Sa Otunuga.

Pantheon Macroeconomics

Meanwhile, Italy is having its own stormy period.

On Friday, Italy's Deputy Prime Minister requested a vote of confidence in the government. It sent markets falling, and bond yields became rockets, 17 basis points to 0.225%.

Italy's debt to GDP is over 130% – historically high – and it does not look like it will get any better.

"There is little that the Government of Italy can do to prevent the debt ratio from rising. For several reasons, not least membership of the Eurozone, the three ways of debt reduction – faster GDP growth, fiscal tightening, and higher inflation – are either shut down or likely to be ineffective. Consequently, we believe that Italy will eventually be forced into debt restructuring or direct default, "Capital Economics said.

Capital Economics, Reinhart & Rogoff (2011), "From economic crash to debt crisis", IMF, Refinitive.

Can the ECB do anything to save this mess?

Not really.

The European Central Bank is likely to cut interest rates in September and ease the pressure on Europe by loosening its policy, but it probably will not do the trick.

Interest rates are already negative, -0.4%. Going further negatively would create logistical problems that, in turn, could reduce further bank lending (because banks would lose money by doing so). The ECB does not have many weapons in its arsenal to provide a stimulus to Europe.

As a result, Europe looks pretty firm.