Eurozone economic slowdown deepens as inflation hits demand
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The slowdown in the eurozone economy has deepened as high inflation and fears of a deepening energy crisis hit demand, adding to evidence that the bloc is heading for a winter recession.
A closely watched survey showed euro zone business activity in October contracted at the fastest pace since the end of 2020. German industrial orders also fell more than expected in September as foreign demand fell , putting Europe’s biggest economy on the road to recession.
S&P Global’s Final Composite Purchasing Managers’ Index (PMI) for the euro zone, considered a good indicator of economic health, fell to a 23-month low of 47.3 in October from 48.1 in September, although it is just above a preliminary estimate of 47.1.
Anything below 50 indicates a contraction.
“The final eurozone PMIs for October paint a clear picture of declining activity and skyrocketing inflation,” said Jack Allen-Reynolds of Capital Economics.
“While this does not yet indicate the 0.5% q/q contraction that we forecast for the fourth quarter, new orders and future production PMIs suggest that the worst is yet to come.”
Asked what kind of recession the eurozone would endure, 22 of 46 people polled in an October Reuters poll said it would be short and shallow, while 15 said it would be long and shallow. Eight said it would be short and deep and only one said it would be long and deep.
In France, the bloc’s second-largest economy, earlier data showed industrial production fell in September, although its PMI indicated growth in the services sector slowed less than initially expected in October.
Activity in Spain’s services sector contracted for the second consecutive month in October, weighed down again by high inflation, its PMI showed.
Inflation in the 19 countries using the euro rose more than expected last month, reaching 10.7% and more than five times the European Central Bank‘s target. Therefore, the ECB is likely to go ahead with further interest rate hikes, which will increase the burden on indebted consumers.
The ECB was the last of its peers to start raising rates in this cycle, waiting until July. At the end of the year, the deposit and refinancing rates were expected to stand at 2.00% and 2.50% respectively.
By contrast, the US Federal Reserve, which began to rise in March, raised interest rates again by three-quarters of a percentage point on Wednesday in what became the fastest US monetary policy tightening in 40 year.
In the Eurozone, high operating expenses due to energy, wage and transport costs prompted service companies to again increase their expenses sharply.
Its producer price PMI was 62.7, the fifth highest figure in the survey’s 24-year history and just below September’s 63.2.
With the Russian-Ukrainian conflict out of sight, nearly 65% of 34 respondents to October’s Reuters poll said the cost of living in the euro zone would rise or worsen significantly .
Since Russia’s invasion of Ukraine in February, energy costs have skyrocketed, and as winter approaches, several European governments have announced new measures to limit rising prices.
“Input and output price PMIs remain extremely strong. Although they have fallen from their recent highs, they are very far above their previous highs,” Allen-Reynolds said.
“The result is that Europe looks set for a painful winter of low activity and high inflation.”
Meanwhile, German industrial orders fell more than expected in September as foreign demand slumped, putting Europe’s biggest economy on the road to recession, data showed on Friday. New orders fell 4.0% in the month on a seasonally and calendar-adjusted basis, the Federal Statistical Office said. A Reuters poll of analysts had indicated a fall of 0.5% in September.
Germany avoided the threat of recession in the third quarter with unexpected growth, but the economy remained in choppy waters as high inflation driven by a painful energy standoff with Russia surged, data showed Friday. last.
The orders data underscored the headwinds Germany is facing as a sluggish global economy, material shortages and energy crisis hamper production.
“The German economy is on the way to recession – this can be inferred from the disastrous new orders,” said Thomas Gitzel, chief economist and vice-president of the Bank.
While domestic orders rose 0.5%, foreign orders fell 7.0%. Within the Eurozone, orders fell 8.0%, while orders from outside the Eurozone fell 6.3%.
“The high level of new orders that had set in after the coronavirus pandemic due to catch-up effects appears to have come to an end,” the economy ministry said.
Declines in the automotive and mechanical engineering sectors in particular, down 9.0 percent and 8.1 percent respectively, dragged down the overall index, the ministry said.