Daily Management Review

A Recession Is Likely In Euro Zone As Demand Impacted By Price Rises


A Recession Is Likely In Euro Zone As Demand Impacted By Price Rises
According to a survey, the decline in business activity across the euro zone widened in September, and consumers cut back on spending as a result of the rising cost of living.
After Russia's invasion of Ukraine, gas prices skyrocketed, which particularly hurt manufacturers. Meanwhile, the dominant services sector of the bloc suffered as consumers stayed at home to save money.
As predicted by a Reuters poll, S&P Global's flash Composite Purchasing Managers' Index (PMI), regarded as a reliable indicator of overall economic health, dropped to 48.2 in September from 48.9 in August.
"The third decline in a row for the euro zone PMI indicates business activity has been contracting throughout the quarter. This confirms our view a recession could have already started," said Bert Colijn at ING.
In a recent poll, a recession in the euro zone within a year was predicted to occur 60 per cent of the time.
Data showed that as higher energy costs hit Europe's largest economy and businesses saw a decline in new business, the downturn in business activity in Germany grew worse.
Although France's PMI indicated the second-largest economy in the euro zone was still having difficulties, activity there was higher than expected as a modest recovery in the services sector partially offset a decline in the manufacturing sector.
"It's possible German GDP fell in Q3 whereas France's economy eked out a small expansion, consistent with our view Germany will suffer more than most over the coming quarters as high energy costs weigh on energy-intensive industry as well as household budgets," said Jack Allen-Reynolds at Capital Economics.
Following the PMI results, the euro, yields on German government bonds, and stocks all decreased.
Outside of the EU, in Britain, the economy deteriorated as businesses struggled with rising costs and weakening demand, highlighting the growing risk of a recession there as well. The new UK finance minister, Kwasi Kwarteng, announced Friday a package of tax cuts, energy subsidies, and planning reforms totaling nearly 200 billion pounds ($223.2 billion).
Since November 2020, when the continent was dealing with a second wave of COVID-19 infections, the overall demand in the euro zone has decreased to its lowest level. New business PMI decreased from 46.9 to 46.0.
The services PMI for the euro zone dropped to 48.9 from 49.8, marking the lowest reading since February 2021 and the second month below 50. A more moderate decline to 49.0 was predicted by the Reuters poll.
Optimism for the upcoming year dwindled as prices started to rise once more and demand decreased. Its lowest level since May 2020, the business expectations index dropped from 56.6 to 53.8.
Additionally, manufacturers had a worse month than anticipated. Their PMI dropped to 48.5 from 49.6, which was the lowest reading since June 2020 and below the 48.7 predicted in the Reuters poll. An output index that feeds into the composite PMI was pushed down from 46.5 to 46.2.
The survey revealed prices had increased more quickly this month, likely causing concern for the European Central Bank, which raised its key interest rates by 75 basis points earlier in September to try and tame inflation running in August at over four times its target.
The manufacturing price indices for input and output both turned upward after declining for some time. The input price index increased from 71.7 to a three-month high of 76.4.