Eurozone: Business activity indicates likely recession with rising prices

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The downturn in business activity across the euro zone deepened in September, according to a survey that showed the economy is likely heading into recession as consumers rein in spending amid a cost-of-living crisis.

The manufacturing industry was particularly hard hit by high energy costs after Russia’s invasion of Ukraine drove up gas prices, while the bloc’s dominant services sector suffered as consumers stayed home to save money.

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S&P Global’s composite purchasing managers index (PMI), seen as a good indicator of overall economic health, dropped to 48.2 in September from 48.9 in August, as expected in a Reuters poll.

“The third consecutive drop for the Eurozone PMI indicates that business activity has been contracting over the course of the quarter. This confirms our view that a recession may have already started,” said Bert Colijn of ING.

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A Reuters poll earlier this month gave a 60% chance of a eurozone recession within a year.

The euro zone services PMI fell from 49.8 to 48.9, its second month below 50 and the lowest reading since February 2021. The Reuters poll predicted a more modest drop to 49.0.

With prices rising again and demand falling, optimism about the next 12 months has waned. The business expectations index dropped to 53.8 from 56.6, the lowest since May 2020.

The industry also had a worse month than expected. Its PMI dropped to 48.5 from 49.6, compared with a 48.7 forecast in the Reuters poll and the lowest since June 2020. An index measuring output, which feeds into the composite PMI, fell from 46, 5 to 46.2.

Germany, France and UK

The slowdown in German business activity deepened as higher energy costs hit Europe’s biggest economy and companies saw a drop in new business, the data showed.

In France, however, activity was higher than expected, as a modest recovery in services offset a slump in manufacturing.

“It is possible that German GDP fell in the third quarter, while France’s economy had a small expansion, consistent with our view that Germany will suffer more than most in the coming quarters as high energy costs weigh on energy-intensive industry and household budgets,” said Jack Allen-Reynolds of Capital Economics.

In the UK, outside the European Union, the economy took a turn for the worse as companies struggled with rising costs and faltering demand, reinforcing the growing risk of recession there too.

Source: CNN Brasil

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