Key European economy looks set for recession

Key European economy looks set for recession
Euro zone stats are defying hopes of recovery.
DEC 15, 2023
By  Bloomberg

Private-sector activity in the euro area worsened at the end of the year, raising the risk that the region may experience a recession in the second half.

S&P Global’s purchasing managers’ index contracted for a seventh month in December, falling to 47. That defied economist expectations of a slight uptick — though they still predicted that the gauge would remain well below the 50 level that marks expansion. Readings for both manufacturing and services showed a slump.

“The figures paint a disheartening picture as the euro-zone economy fails to display any distinct signs of recovery,” Hamburg Commercial Bank Chief Economist Cyrus de la Rubia said. “The likelihood of the euro zone being in a recession since the third quarter remains notably high.”

Friday’s numbers — which also showed that inflows of new business fell sharply — chime with indicators and data that suggest the region’s contraction in the three months through September saw a repeat in the final period of the year. Still, the European Central Bank’s latest forecasts, published Thursday, predict a slight improvement in the period.

Similar to the overall trend, separate PMIs for Germany and France showed the downturn worsened in the euro area’s two biggest economies.

German bonds extended gains and the euro fell after the figures were released. Traders added to bets on ECB rate cuts next year after the softer data, pricing 155 basis points of monetary easing — that’s down from about 150 basis points on Thursday.

What Bloomberg Economics Says...

“The survey suggests the broader picture is one of an economy still contracting. That creates downside risks for our forecasts as well as the European Central Bank’s and should keep market expectations for an interest-rate reduction before June alive”

-David Powell, economist. Click here for full REACT

Geopolitics, customer reluctance and the ECB’s battle against inflation were cited as reasons for the subdued performance in Germany. Uncertainty about the country’s public finances after a landmark Constitutional Court ruling sparked a budget crisis may also have weighed on activity, S&P Global said.

There’s an “increasing number of companies reporting a reduction in output in both the service and manufacturing sectors,” de la Rubia said. “This confirms our view of a second consecutive quarter of negative growth by the year’s close, driven by the manufacturing sector.”

Adding to the gloom, the Bundesbank predicted earlier that Germany will barely grow in 2024 after contracting this year.

The French data, meanwhile, point to a 0.2% contraction in the final quarter of the year, S&P Global said. That would follow a 0.1% dip in the three months through September.

“The French economy is sinking into the recession quagmire,” said Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank. “Survey participants attribute lower activity levels to weak demand conditions, reduced purchasing power of customers, and general sluggishness in the economy – not good news for year-end growth.”

France’s statistics agency Insee was more upbeat on Thursday, predicting stagnation in the final three months of this year. It forecast expansion of just 0.2% in each of the first two quarters of 2024.

PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.

Employment fell in both countries, adding to tentative signs of softening in the euro area’s labor market, which has served as a bright spot so far.

The picture on inflation was mixed. While pressures eased in France, German services firms hiked their prices at a steeper rate, serving as a reminder of lingering risks to the outlook, S&P Global said.

Separate data for the UK showed companies saw the strongest rebound in output in six months, reflecting more stable borrowing costs and higher demand for services.

Earlier PMI numbers from Australia pointed to a less steep decline, and a gauge for Japan returned to growth. US figures later on Friday are expected to indicate continued expansion.

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