The eurozone is almost definitely steering into a recession, with polls on Monday showing a heightening cost of living crisis and a stark outlook that is keeping consumers cautious of spending.
While there was some allaying of price pressures, according to the polls, they remained elevated and the European Central Bank is facing pressure as inflation is running at more than four times its 2% target, climbing to a record 9.1% in August.
It faces the probability of hiking interest rates aggressively just as the economy enters a slowdown.
An increase in borrowing costs would add to the pain of indebted consumers, yet in a Reuters poll last week close to half of the economists polled said they forecast an unprecedented 75 basis-point rate rise from the ECB this week, while almost as many expect a 50 bps rise.
Despite those projections, the euro fell below 99 U.S. cents for the first time in two decades on Monday after Russia said gas supply down its main pipeline to Europe would remain shut indefinitely.
Gas prices on the continent climbed as much as 30% on Monday, triggering fears of shortages and strengthening expectations for a recession and a harsh winter as households and businesses are squeezed by soaring energy prices.
S&P Global’s final composite Purchasing Managers’ Index (PMI), seen as a guide to economic health, dropped to an 18-month low of 48.9 in August compared to July’s 49.9, below a provisional 49.2 estimate. Anything below 50 points to a contraction.
Peter Schaffrik at the Royal Bank of Canada stated:
“The PMI surveys signal that the euro area is entering recession earlier than we previously thought, led by its largest economy Germany, and we now see the euro area ‘enjoying’ a longer, three-quarter recession.”
“The revision is mainly due to developments in energy prices which, even after retreating over recent days, remain elevated and which mean that the impact on household spending will be larger than we hitherto anticipated.”
That expectation of a recession hurt investor morale in the currency union and it dropped in September to its lowest since May 2020, a different poll showed.
Services activity in Germany, Europe’s biggest economy, deteriorated for a second-month consecutive month in August as domestic demand met pressure from surging inflation and wavering confidence, previous figures showed.
Its economy is on track to shrink for three straight quarters beginning with this one, a Reuters survey suggested last week. In France, the euro zone’s second-biggest economy, the services sector contracted further and only managed to scrape up marginal growth with purchasing managers saying the outlook was grim.
The Italian services industry returned to marginal growth but in Spain activity grew at the slowest rate since January, with companies worried that inflation would hamper their profits and customer demand.
In Britain, the economy ended August on a much shaky footing than earlier expected as overall business activity declined for the first time since February last year in a clear sign of recession, its PMI showed.
Later on Monday, the country will find out who will become its next prime minister, tasked with attempting to deal with an economy experiencing a long recession alongside high inflation and industrial unrest.
In Asia, polls showed a strong recovery in China’s services sector reduced slightly amid fresh COVID-19 outbreaks, while in Japan the sector deteriorated for the first time in five months. However, India’s leading service industry expanded faster than anticipated in August owing to a strong increase in demand and a continued easing in price pressure.
