The Eurozone is likely to enter a recession as higher prices affect demand -PMI

The Eurozone is likely to enter a recession as higher prices affect demand -PMI

by Jonathan Cable

LONDON (Reuters) – The slowdown in business activity in the euro zone deepened in September, according to a survey that showed the economy is likely to enter a recession as consumers curb spending amid a cost-of-living crisis.

Manufacturers were hit particularly hard by rising energy costs after Russia’s invasion of Ukraine sent gas prices soaring, while the bloc’s dominant service industry suffered as consumers stayed home to save money.

S&P Global’s (NYSE) Composite Purchasing Managers’ Index (PMI), seen as a good measure of overall economic health, fell to 48.2 in September from 48.9 in August, as expected in a Reuters poll.

“The third consecutive drop in the Eurozone PMI indicates a contraction in business activity over the quarter. This confirms our view that a recession may already have begun,” said Bert Cullen of ING.

A Reuters poll earlier this month showed a 60 percent chance of a recession in the euro zone within a year.

Data showed that the slowdown in German business activity deepened as rising energy costs hit Europe’s largest economy and firms saw a drop in new business.

However, activity in France was higher than expected although the PMI showed that the second largest economy in the Eurozone was still struggling as a modest recovery in services offset the decline in the manufacturing industry.

Jacques said: β€œGerman GDP is likely to have declined in the third quarter, while the French economy has expanded slightly, consistent with our view that Germany will suffer more than most over the coming quarters as higher energy costs affect industry-intensive. Energy consumption in addition to household budgets. Allen Reynolds at Capital Economics.

Euro, German government bond yields and stocks all fell after the PMI data.

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In Britain, outside the European Union, the economy has worsened as companies grapple with rising costs and faltering demand, exacerbating recession risks there as well. In an effort to spur growth, Britain’s new finance minister Kwasi Quarting on Friday detailed nearly 200 billion pounds ($223.2 billion) in tax cuts, energy subsidies and planning reforms.

Price pressures

Total demand in the eurozone has fallen to its lowest levels since November 2020, when the continent was experiencing a second wave of COVID-19 infections. The new business PMI fell to 46.0 from 46.9.

The euro zone services PMI fell to 48.9 from 49.8, its second month below 50 and the lowest reading since February 2021. A Reuters poll had forecast a more modest decline to 49.0.

With prices rising again and demand waning, optimism about the next 12 months has waned. The business expectations index fell to 53.8 from 56.6, the lowest level since May 2020.

Manufacturers also had a worse month than expected. Its PMI fell to 48.5 from 49.6 compared to a forecast of 48.7 in a Reuters poll and the lowest since June 2020. An index measuring production, which feeds into the composite PMI, fell to 46.2 from 46.5.

Likely to worry the European Central Bank, which raised key interest rates by 75 basis points earlier in September in an effort to tame inflation that hit in August more than four times its target, the survey showed rates rose faster this month.

The Input and Output Manufacturing Price Indexes reversed a downward trend and rose. The input price index reached a three-month high of 76.4 from 71.7.

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(dollar = 0.8962 pounds)

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