Eurozone business activity slides faster than feared

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Eurozone business activity has suffered its biggest contraction for almost two years, adding to signs that the bloc is entering a recession as prices rise and output plummets across the economy.

S&P Global’s flash eurozone composite purchasing managers’ index, a key gauge of business conditions for the manufacturing and services sector, fell 1 point to 47.1, figures out on Monday showed. That is its lowest level since November 2020 and the fourth consecutive month below the crucial 50 mark separating growth from contraction.

“The eurozone economy looks set to contract in the fourth quarter given the steepening loss of output and deteriorating demand picture seen in October,” said Chris Williamson, chief business economist at S&P Global, adding that a recession looked “increasingly inevitable”.

Growth figures for the third quarter for the region’s two largest economies, Germany and France, are due to be published on Friday and are set to show the impact of soaring fuel and food prices. Russia’s squeeze on gas supplies to Europe has led energy-intensive companies to cut, or even suspend, production. Consumers facing soaring energy, food and borrowing costs have cut back on spending as the summertime boost from the lifting of Covid-19 restrictions fades.

The grim outlook was underlined by the IMF, which warned in its report on the region published at the weekend: “Europe has been hit by a massive terms-of-trade shock that has weakened the growth outlook, further raised the level and persistence of inflation, and led to a cost of living crisis that threatens social cohesion.”

The results of the monthly PMI survey, which signalled falling factory output, declining new orders, rising factory gate prices and weakening expectations, were worse than expected by economists polled by Reuters.

S&P Global said eurozone manufacturers reported a fifth consecutive decline in factory output in October and their backlogs of work fell for a fourth straight month. Services companies said their decline in new orders accelerated for a third month.

“In the euro area, everything points to a recession,” said Christoph Weil, an economist at Commerzbank. “The continuing loss of purchasing power due to high inflation is leaving ever deeper traces on private consumption.”

One of the few bright spots in the S&P Global survey was that companies in all sectors reported a slight easing of cost pressures, price growth and supply chain constraints. However, prices charged for goods and services still rose at the sixth fastest rate since such data started in 2002. Job growth increased marginally from October, but remained low compared with the past 18 months.

“Following a few months of falling price pressure in manufacturing and services, the October print shows an overall stabilisation,” said Jens Eisenschmidt, chief European economist at Morgan Stanley. “This could suggest that the peak is behind us at this stage, but also that prices are stuck at a high level.”

German businesses have been at the centre of Europe’s energy crisis and they reported that activity contracted in manufacturing and services, dragging the country’s PMI reading down 1.6 points to 44.1, its lowest level since May 2020. “High price pressures, rising interest rates and growing hesitancy among customers due to recession fears all acted to suppress demand [in Germany],” said S&P.

French companies reported a stagnation of activity with expansion in services activity offsetting a decline in manufacturing to take their PMI reading down 1.2 points to 50, a 19-month low. French factory orders fell at a pace only exceeded in the 2008 financial and 2012 debt crises.

German gross domestic product is expected to shrink in the third quarter, when figures for the period are released on Friday. France, which has the lowest inflation rate in the euro area, is expected to continue growing, albeit at a slower rate. Most economists, however, expect the overall eurozone economy to start contracting in the fourth quarter of this year.

Silvia Ardagna, chief European economist at Barclays, forecast that the eurozone economy would contract 1.7 per cent between the final quarter of this year and the second quarter of 2023, a similar peak-to-trough decline in GDP to the one during the region’s sovereign debt crisis of 2012.

The eurozone economy benefited from “some strengthening of tourism and services after the reopening over the summer, but that now looks like it was a one-off”, Ardagna said.