Euro zone unlikely to avoid recession as downturn deepens -PMI

LONDON (Reuters) – A steepening drop in euro zone business activity last month will likely put paid to any hopes the currency union avoids recession, just as elevated inflation puts pressure on the European Central Bank to act, a survey showed.

S&P Global (NYSE:)’s final composite Purchasing Managers’ Index (PMI) for the euro zone, seen as a good gauge of economic health, fell to a 20-month low of 48.1 in September from August’s 48.9, below a preliminary 48.2 estimate. Anything below 50 indicates contraction.

“Any hopes of the euro zone avoiding recession are further dashed by the steepening drop in business activity signalled by the PMI,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

“Not only is the survey pointing to a worsening economic downturn, but the inflation picture has also deteriorated, meaning policymakers face an increasing risk of a hard landing as they seek to rein in accelerating inflation.”

Reversing a downward trend, both the composite input and output prices indexes rose sharply. The input prices PMI jumped to 77.1 from 72.3.

Rising prices, particularly energy costs, alongside a gloomy economic outlook have kept consumers wary and the PMI for the bloc’s dominant services industry sank to 48.8 last month from 49.8, its lowest since February 2021.

“Soaring inflation, linked to the energy crisis and war in Ukraine, is destroying demand at the same time that business confidence is slumping to levels not seen since the region’s debt crisis in 2012, excluding pandemic lockdowns,” Williamson said.

“Companies and households alike are therefore cutting back on discretionary spending and investment in preparation for a harsh winter.”

Wednesday’s data comes after a sister survey on Monday showed manufacturing activity across the euro zone declined further last month as a growing cost of living crisis hurt demand while soaring energy bills limited production. [EUR/PMIM]

The decline in activity across the region but with prices rising much faster than the ECB would like leaves the central bank walking a tightrope as it tries to curtail inflation while also supporting growth.

Last month the ECB raised its key interest rates by an unprecedented 75 basis points and promised further hikes, prioritising the fight against inflation even as the bloc is likely heading towards a winter recession and gas rationing.

A combination of those downbeat factors meant optimism fell sharply. The services business expectations index fell to 53.6 from 56.6, its lowest since May 2020 when the coronavirus pandemic was cementing its grip on the world.

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