Europe may avoid economic crisis, while UK heads for recession

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Business activity in the 20 countries that use the euro rose in January for the first time in six months, according to data published on Tuesday, providing new evidence that Europe’s economy can confound expectations and avoid a recession. this year.

An initial reading of the euro zone Purchasing Managers’ Index, which tracks activity in the manufacturing and services sectors, rose to 50.2 in January from 49.3 in December, signaling the first expansion since June. A reading above 50 represents growth.

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The return to modest growth was aided by falling energy prices and an easing of supply chain stress, which helped to moderate rising input costs for producers.

The rise was accompanied by a marked improvement in optimism about the year ahead, as the recent reopening of China’s economy following the lifting of Covid restrictions helped lift confidence to the highest level since last May.

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Growing optimism in Europe that consumers in China will start spending again was reflected in Swiss watchmaker Swatch’s Tuesday forecast of record sales for 2023.

“The stabilization of the euro zone economy at the start of the year adds to the evidence that the region can escape recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence, the firm that publishes the survey of business executives. of the private sector.

Williamson added, however, that a “renewed slide into contraction” should not be ruled out as borrowing costs rise due to interest rate hikes by the European Central Bank. But any downturn “is likely to be much less severe than previously feared,” he says.

Berenberg chief economist Holger Schmieding said in a research note that “the still-low level of consumer confidence and the lagged impact of ECB rate hikes still point to a slight contraction in eurozone GDP in the short term. before the recovery can start to take hold.”

Consumer sentiment in Germany, the region’s largest economy, looks set to improve for the fourth straight month in February from a very low base, according to a separate survey published by GfK on Tuesday.

UK economy contracts sharply

The picture looks much less rosy in the UK, however, where the January PMI survey showed the steepest decline in business activity since the national Covid lockdown two years ago, with higher interest rates and low consumer confidence depressing the economy. activity in the dominant services sector.

The initial reading fell to 47.8 in January from 49 in December, remaining in a state of contraction for the sixth straight month. The UK survey is carried out in conjunction with the Chartered Institute of Procurement & Supply.

“The weaker than expected PMI numbers in January underscore the risk of the UK slipping into a recession,” said Williamson. “Industrial disputes, personnel shortages, losses in exports, rising cost of living and higher interest rates meant that the rate of economic decline accelerated again at the beginning of the year,” he added.

The UK economy lost more working days to strikes between June and November 2022 than in any six-month period in the previous 30 years, according to data published last week by Britain’s Office for National Statistics.

Williamson said Tuesday’s data reflected not just short-term impacts to growth such as strikes, but “continued damage to the economy from longer-term structural issues such as labor shortages and trade problems linked to Brexit. ”.

Despite a dismal start to the year, UK business expectations for the year ahead hit their highest level in eight months, buoyed by hopes for an improving global economic outlook and lower inflation.

Separate data published by the ONS on Tuesday showed UK government borrowing reached 27.4 billion pounds ($33.7 billion) in December, the highest figure for that month since records began in 1993. This was driven by a sharp increase in spending to support domestic energy bills, as well as the rising cost of paying interest on government debt.

Source: CNN Brasil

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