Euro zone likely in recession, PMI surveys show

LONDON – The downturn in euro zone business activity surprisingly deepened in December, according to closely watched surveys which indicated the bloc’s economy is almost certainly in recession.

It was a broad-based decline with activity deteriorating in both Germany and France and across services and manufacturing, the surveys showed.

Last quarter, the euro zone economy contracted 0.1%, official data has shown, and December’s Purchasing Managers’ Index (PMI) – seen as a good gauge of economic health – suggested activity has now declined in every month of this quarter. That would mark two consecutive quarters of economic contraction, meeting the technical definition of recession.

The European Central Bank trimmed its growth forecasts for 2023 and 2024 on Thursday.

HCOB’s preliminary Composite PMI, compiled by S&P Global, fell to 47.0 this month from November’s 47.6, confounding expectations in a Reuters poll for an uptick to 48.0 and marking its seventh month below the 50 level separating growth from contraction.

“The drop-back in the euro zone Composite PMI in December provides more evidence that the economy is in recession,” said Andrew Kenningham at Capital Economics.

In Germany the downturn worsened, pointing to a recession in Europe’s biggest economy at the end of the year. Meanwhile activity declined faster than expected in France as demand for goods and services in the euro zone’s second-biggest economy deteriorated further.

Germany’s economy is set to shrink slightly this year and barely grow next as demand from abroad is weak, government subsidies for the green transition are curbed and high interest rates dampen activity, the Bundesbank said earlier on Friday.

Companies in Britain’s huge services sector however saw another pick-up in growth this month, suggesting the economy has just enough momentum to avoid a recession for now at least.

WAITING GAME

Indicating firms in the euro zone do not see a big improvement anytime soon they reduced staffing for a second month. The composite employment index was at a three-year low of 49.6, just shy of November’s 49.7.

A PMI for the bloc’s dominant services industry fell to 48.1 from 48.7, far short of the Reuters poll prediction of a rise to 49.0.

“This confirms our expectation that the euro area economy will continue to contract in Q4, contrary to the ECB’s expectations,” said Christoph Weil at Commerzbank.

Demand for services fell again as indebted consumers feeling the pinch from record-high borrowing costs in the 20-country currency union spent less. The new business index dipped to 46.6 from 46.7.

On Thursday, the ECB left interest rates on hold and pushed back against bets on imminent cuts by reaffirming borrowing costs would remain at record highs. A recent Reuters poll showed it would wait until the second quarter before it starts cutting.

The ECB’s next move should be lowering interest rates, French central bank chief Francois Villeroy de Galhau said on Friday but implied a rate cut was not imminent.

Factories in the currency union also had another disappointing month. The manufacturing PMI held steady at November’s 44.2 – missing the Reuters poll forecast for 44.6 and chalking up its 18th month sub-50.

An index measuring output fell to 44.1 from 44.6.

Factory managers were more optimistic, though, about the year ahead and the future output index jumped to 55.6 from 53.3, its highest since May.