Fears of a severe recession deepen as European business activity slows on surging energy costs

Date: October 24, 2022

 

News Author(s): Silvia Amaro
Photo Credit: Anna Moneymaker | Getty Images News | Getty Images
Source: cnbc.com

 

European business activity took another hit in the month of October, reporting the steepest output loss since April 2013 excluding pandemic lockdowns.

Firms have been under pressure due to higher inflation, particularly coming from energy costs and wage pressures.

The euro zone’s flash composite Purchasing Managers’ Index fell to 47.1 in October, down from 48.1 in September. A reading below 50 represents a contraction in activity.

“These numbers post some downside risk to a lot of people’s forecasts, notably the ECB’s,” Chris Williamson, chief business economist at S&P Global Market Intelligence, told CNBC’s “Squawk Box Europe” on Monday.

The European Central Bank said in September that the 19-member bloc is set to grow 3.1% this year and 0.9% in 2023. The central bank also forecast inflation at 8.1% this year and at 2.3% in 2024.

Manufacturing activity led the losses, but services output also dropped for a third consecutive month.

In terms of national breakdown, business activity in Germany came in at 44.1, versus 45.7 in the previous month. Over in France, activity stagnated with a reading at 50 from 51.2 in September.

“The situation economically is getting worse quite rapidly,” Williamson said.

Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said that the latest data “point to a German recession, as the energy shock is increasingly hitting the real economy.”

The euro lost ground against the U.S. dollar and the British pound during morning deals in London, trading at $0.982 and £0.868 respectively, and following the latest PMI data.

The euro has been under pressure amid a hawkish Federal Reserve and the energy crisis facing the euro zone in the wake of Russia’s invasion of Ukraine.

ECB meeting

The ECB is expected to raise rates by another 75 basis points when it meets Thursday. This would be the third consecutive increase to the main rate in the euro zone, after a 50 basis point hike in July and a 75 basis point jump in September.

The main rate is currently sitting at 0.75%, but ECB watchers expect that further rate hikes in the coming months could push it to about 2% by the end of the year.

Sebastian Galy, senior macro strategist at Nordea Asset Management, said the question now is “whether the ECB can avoid a severe recession amid an inflation shock.”

Aggressive policy tightening could push the euro area into a recession, particularly as consumer prices hit record levels. Euro area annual inflation was 9.9 % in September, according to the region’s statistics office, and the highest ever on record.

Several economists are already pricing in an economic slowdown before the end of the year. However, ECB member Gabriel Makhlouf said last week that despite the risk of a recession, further rate increases remain necessary, according to Reuters.

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