Euro zone business activity has unexpectedly worsened this month, with demand falling across the region, according to a survey by HCOB’s flash euro zone Composite Purchasing Managers’ Index (PMI). The survey, seen as a reliable indicator of economic health, showed a decline to 46.5 in October from 47.2 in September, the lowest since November 2020. This suggests that the euro zone may slip into a recession, presenting a challenge for the European Central Bank (ECB) as it meets this week.
The disappointing survey results are expected to impact the ECB’s interest rate decisions. Market pricing now suggests that ECB President Christine Lagarde’s outlook of ‘higher-for-longer’ interest rates may not hold as some had anticipated. The poor start to October for the euro zone could pose downside risks to growth forecasts for the fourth quarter, according to Rory Fennessy at Oxford Economics.
The survey also revealed that Germany, Europe’s largest economy, is experiencing a recession, with business activity contracting for a fourth consecutive month. The decline in manufacturing was coupled with a renewed decline in services. Additionally, consumer sentiment in Germany is set to fall for the third consecutive month in November, dampening hopes of a recovery this year.
France, the euro zone’s second-largest economy, also faced a reduction in business activity in October. Although the contraction was milder than in September, it still marked the second-steepest decline in close to three years.
Outside the euro zone, businesses in the UK reported a decline in activity this month, highlighting the risk of a recession ahead of the Bank of England’s interest rate decision next week.
The outlook for the euro zone’s economy remains bleak, with geopolitical tensions and other risks further exacerbating the situation. World Bank President Ajay Banga stated that the ongoing conflict in the Middle East poses the biggest threat to the global economy, along with Russia’s invasion of Ukraine. While a recent Reuters poll suggests that the euro zone may narrowly avoid a recession, the economy is expected to have stagnated last quarter and will likely remain unchanged in the current one.
Euro zone banks have tightened access to credit, despite a greater-than-expected fall in demand due to high borrowing costs and a deteriorating economic outlook, according to an ECB survey. October’s business activity was largely driven by firms completing existing backlogs of work, indicating a lack of confidence in a swift recovery. As a result, overall headcount was reduced for the first time since January 2021.
The PMI for the euro zone’s dominant services industry reached a 32-month low of 47.8, while the manufacturing PMI fell to 43.0, marking its 16th month below 50, the lowest since May 2020. The outlook for the future also appears grim, as the future output index dropped to 50.3, the lowest reading this year.
Economists, including Andrew Kenningham at Capital Economics, believe that these survey results reinforce the view that the euro zone economy is likely to contract in the fourth quarter, following a contraction in the third quarter.
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