Worsening euro zone business downturn reignites recession fears
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[July 24, 2023] By
Jonathan Cable
LONDON (Reuters) -Euro zone business activity shrank much more than
expected in July as demand in the bloc's dominant services industry
declined while factory output fell at the fastest pace since COVID-19
first took hold, a survey showed.
The decline was broad-based with the euro zone's two biggest economies -
Germany and France - both in contractionary territory and will likely
add to fears the bloc will slip back into recession.
The survey also indicated the European Central Bank's sustained campaign
of interest rate rises is starting to take its toll on consumers and
denting the services sector.
This will pose questions for the bank, which meets on Thursday, as it
weighs its fight against record inflation against the economic damage it
could cause.
HCOB's flash Composite Purchasing Managers' Index (PMI) for the euro
area, compiled by S&P Global and seen as a good gauge of overall
economic health, dropped to an eight-month low of 48.9 in July from
June's 49.9.
That was below the 50 mark separating growth from contraction and lower
than all expectations in a Reuters poll which had predicted a modest dip
to 49.7.
"The weakness was widespread across all sectors, but it was the
manufacturing sector that posted another bad reading," said Paolo
Grignani at Oxford Economics.
"Today's print confirms the deterioration in macroeconomic conditions is
well underway and spreading from manufacturing to other sectors. In our
baseline case we expect subdued growth for the second half of the year,
but today's data suggest the risk of a small contraction in euro zone
GDP in Q3 is increasing."
Activity in Germany, Europe's largest economy, contracted in July,
increasing the likelihood of a recession in the second half.
In France a downturn extended into July as both the services and
manufacturing sectors did worse than expected.
The euro slid and the bloc's government bond yields fell after the
softer than expected data.
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Workers assemble campers at
Knaus-Tabbert AG factory in Jandelsbrunn near Passau, Germany, March
16, 2021. REUTERS/Andreas Gebert/File Photo
The private sector in Britain, outside the euro zone, is growing at
its weakest pace in six months in July as orders for businesses
stagnate in the face of rising interest rates and still-high
inflation.
A PRICE TO PAY
The euro zone services PMI fell to 51.1 from 52.0, its lowest since
January and shy of the Reuters poll forecast for 51.5.
Indebted consumers feeling the pinch from rising borrowing costs and
prices cut back on spending, and the services new business index
went below breakeven for the first time in seven months.
A PMI covering the bloc's manufacturing sector dropped to 42.7 from
43.4. The Reuters poll had forecast a slight rise to 43.5.
An index measuring output, which feeds into the composite PMI, fell
to its lowest in over three years.
The decline came despite manufacturers running down backlogs of work
and cutting their prices. Factories benefited from a sharp drop in
input costs due to falling demand for materials and improved supply.
"Input price pressures continued to ease, but this was almost
entirely due to costs falling in the manufacturing sector, which in
turn probably reflects lower energy prices as well as improved
global supply conditions," said Jack Allen-Reynolds at Capital
Economics.
While prices in services proved stickier, any sign of easing
pressures will probably be welcomed by policymakers at the ECB who
have failed to get inflation back to their 2% target despite
implementing the most aggressive policy tightening schedule in the
bank's history.
They will raise interest rates by 25 basis points on Thursday adding
to the woes of consumers, according to all economists in a Reuters
poll, a slight majority of whom expect another hike in September.
(Reporting by Jonathan Cable; editing by John Stonestreet and Toby
Chopra)
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