Eurozone Likely To Enter Recession As Surging Prices Hit Demand

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The downturn in business activity across the eurozone deepened this month and the economy is likely entering a recession as consumers rein in spending amid a cost of living crisis, reports the Business Times.

Manufacturers hit by high energy costs

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

S&P Global’s flash Composite Purchasing Managers’ Index (PMI), seen as a good gauge of overall economic health, fell to 48.2 in September from 48.9 in August, as expected by a Reuters poll. September was the third month below the 50 mark separating growth from contraction.

Eurozone recession

A eurozone recession is on the cards as companies report worsening business conditions and intensifying price pressures linked to soaring energy costs,” said Chris Williamson, chief business economist at S&P Global.

Although there were some signs of supply chain constraints easing, the focus of concern has clearly shifted away from supply chains to energy and the rising cost of living, which is not only hitting demand but also limiting manufacturing production and service sector activity in some cases.”

A Reuters poll earlier this month gave a 60 per cent chance of a recession in the eurozone within a year.

Demand falls to lowest since 2020

Overall demand fell to its lowest since November 2020, when the continent was suffering a second wave of Covid-19 infections. The new business PMI fell to 46.0 from 46.9.

The services PMI fell to 48.9 from 49.8, its second month sub-50 and the lowest reading since February 2021. The Reuters poll had predicted a more modest fall to 49.0.

With prices on the rise again and demand falling, optimism about the coming 12 months waned. The business expectations index fell to 53.8 from 56.6, its lowest since May 2020.

Prices rise faster

Manufacturers also had a worse month than predicted. Their PMI sank to 48.5 from 49.6, compared with the 48.7 forecast in the Reuters poll and the lowest since June 2020. An index measuring output, which feeds into the composite PMI, nudged down to 46.2 from 46.5.

Likely of concern to 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 survey showed prices had risen faster this month.

Both the input and output manufacturing prices 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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Source: The Business Times

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