Easing of eurozone business woes allays fears of deep recession

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The eurozone economy showed early signs of bottoming out in a business survey that allayed fears of a deepening recession after a slight improvement in companies’ activity levels, despite remaining in contraction territory.

S&P Global’s closely tracked survey of purchasing managers across the single currency zone found evidence of an easing in the recent decline of new business orders, backlogs of outstanding work and output. Activity fell faster in the manufacturing sector than in services in November, the survey found, but the pace of decline softened in both from a month ago. 

“One might find rays of hope gleaming on the horizon for the coming year,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which sponsors the survey, said on Thursday. However, he warned that the “eurozone economy remains stuck in the mud”, with the bloc’s gross domestic product set to contract for the second consecutive quarter in the final months of this year.

The HCOB flash eurozone composite purchasing managers’ index, a measure of activity at companies across the 20-country bloc, rose to a two-month high of 47.1, up from 46.5 the previous month. 

The result remained below the 50 mark that separates contraction from expansion for the sixth consecutive month, signalling eurozone business output continued to shrink. But it was higher than expected by economists in a Reuters poll, who had forecast a reading of 46.9.

The higher reading of 47.1 for Germany, the bloc’s largest economy, outstripped forecasts despite remaining in contraction territory for a third consecutive month.

“The worst could be over soon,” said Holger Schmieding, chief economist at German bank Berenberg. “After a grey autumn with a likely decline in eurozone GDP in the fourth quarter, the economy looks set to hit bottom before the turn of the year, stabilise in early 2024 and enjoy a firming upswing from spring onwards.”

But the outlook for France turned gloomier as its PMI reading of 44.5 came in below expectations, the country’s businesses blamed “geopolitical and economic uncertainty” for falling orders and its manufacturing activity sank to a 42-month low. The eurozone economy shrank 0.1 per cent in the three months to September from the previous quarter after stagnating for most of this year. 

Officials at the European Central Bank expect the economy to rebound as wages rise faster than inflation, boosting the spending power of households, despite the squeeze of higher borrowing costs. The central bank has raised interest rates by an unprecedented 4.5 percentage points since July 2022.

Inflationary pressures continued to rise, the PMI survey found, as rapid wage growth pushed up input costs in the labour-intensive services sector, which rose at the fastest pace since May and drove a further increase in selling prices. 

“Overall, output prices increased solidly in November, with the rate of inflation ticking up from October,” S&P said, adding that services companies had raised their prices at a faster rate, while they were falling at manufacturers.

Separate data published by the ECB this week showed eurozone negotiated wage growth accelerated from 4.4 per cent in the second quarter to 4.7 per cent in the third quarter.

There was, however, more evidence of cracks appearing in the eurozone labour market after the survey found overall employment had fallen for the first time in almost three years, albeit only a marginal decline.

“The overall reduction was driven by manufacturing where jobs were cut to the largest extent since August 2020,” it said. “In contrast, service providers continued to expand their staffing levels.”

The continued downturn in business activity pointed to “increasing signs of recession in the euro area,” said Christoph Weil, economist at Commerzbank. However, he said investors hoping the ECB could cut rates as early as April were likely to be disappointed due to the “still high underlying inflationary pressures created by rapid wage growth”.