Business activity slows due to soaring energy costs
The business climate in the euro zone fell again ahead of an ECB meeting at which President Christine Lagarde is expected to raise rates again.
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European commercial activity was hit again in October, recording the largest production loss since April 2013, excluding pandemic closures.
Businesses have been under pressure from rising inflation, including energy costs and wage pressures.
The Eurozone Purchasing Managers’ Flash Composite Index fell to 47.1 in October from 48.1 in September. A reading below 50 represents a contraction in activity.
“These numbers pose a downside risk to many people’s forecasts, including those of the ECB,” Chris Williamson, chief economist at S&P Global Market Intelligence, told CNBC’s “Squawk Box Europe” on Monday.
The European Central Bank said in September that the 19-member bloc is expected to grow 3.1% this year and 0.9% in 2023. The central bank also forecast inflation at 8.1% this year and 2 .3% in 2024.
Manufacturing activity led the losses, but services output also fell for a third consecutive month.
In terms of national breakdown, business activity in Germany came in at 44.1, down from 45.7 the previous month. In France, activity stagnated with a reading of 50 versus 51.2 in September.
“The economic situation is getting worse pretty quickly,” Williamson said.
Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said the latest data “points to a German recession, as the energy shock increasingly hits the real economy.”
The euro lost ground against the US dollar and sterling in morning trading in London, trading at $0.982 and £0.868 respectively, following the latest PMI data.
The euro has come under pressure amid a hawkish Federal Reserve and the energy crisis facing the eurozone following Russia’s invasion of Ukraine.
The ECB is expected to hike rates another 75 basis points when it meets on Thursday. This would be the third consecutive increase in the key rate for the euro zone, after a rise of 50 basis points in July and a jump of 75 basis points in September.
The main rate currently sits at 0.75%, but ECB watchers expect further rate hikes in the coming months could push it to around 2% by the end of the year. .
Sebastian Galy, senior macro strategist at Nordea Asset Management, said the question now was “whether the ECB can avoid a severe recession amid an inflationary shock.”
Aggressive policy tightening could push the Eurozone into recession, especially as consumer prices hit record highs. Eurozone annual inflation was 9.9% in September, according to the region’s statistics office, and the highest on record.
Several economists are already counting on an economic slowdown before the end of the year. However, ECB member Gabriel Makhlouf said last week that despite the risk of recession, further rate hikes are still needed, according to Reuters.