Eurozone Economy Likely Shrank in Q3 as Inflation and Rising Interest Rates Bite

The euro zone economy likely shrank last quarter as indebted consumers cut back on spending in the face of rising borrowing costs and rising prices, with demand falling the most in nearly three years in September, according to surveys .

Although the final Eurozone Markit Composite PMI rose to 47.2 in September from 46.7 in August, against expectations of 47.1, it was the fourth consecutive month below the 50 mark that separates expansion from contraction, which is seen as a gauge of overall economic health. Good indicator.

Meanwhile, official data showed that retail sales in the euro zone fell much more than expected in August, pointing to weak consumer demand as inflation remains high.

Eurozone economy more at a standstill

Looking at the breakdown of each member state, the situation is not optimistic. Although Germany’s service sector activity rebounded slightly in September, economic performance remained weak due to continued drag on manufacturing activity. The final value of Germany’s Markit service industry PMI in September was 50.3, slightly higher than the expected 49.8; however, the final value of Germany’s Markit comprehensive PMI in September was 46.4, still below the boom-bust line.

Separately, France contracted slightly for the second month in a row, although activity in France’s services sector all picked up slightly, and manufacturing shrank at the fastest pace in almost three years as a slump in new orders and exports weighed on the euro zone’s second-largest economy. , the overall economy remains below expansionary levels. France‚Äôs final Markit composite PMI value in September was 44.1, compared with expectations of 43.5.

Cyrus de la Rubia, chief economist of Hamburg Commerzbank, commented on the final value of the Eurozone services PMI in September, saying that given the rise in the HCOB Eurozone services PMI index in September, people may see some signs of recovery. But not that fast.

First, the index remains in contraction territory. Even looking at Germany and Spain, where the index rose above 50, recovery has only occurred slightly, suggesting that the economies in these parts of the euro zone are more at a standstill. Then there’s France, the euro zone’s second-largest economy, where business activity is not just falling, but plummeting, pointing to a deeper recession. The Eurozone’s HCOB composite PMI index did rebound. However, we cannot jump on the hope train just yet.

Weak consumer demand

Euro zone output fell in both services and manufacturing in September, as in August, a survey showed on Wednesday, with the downturn being broad-based.

Meanwhile, official data showed that retail sales in the euro zone fell much more than expected in August, pointing to weak consumer demand as inflation remains high. Retail sales in the Eurozone fell by 1.2% month-on-month in August (expected to fall by 0.3%), compared with the previous value of 0.2%. Retail sales in the Eurozone fell by 2.1% year-on-year in August (expected to fall by 1.2%), and the previous value fell by 1%.

Franziska Palmas, economist at Capital Economics, said: “The decline in retail sales in August and the weak final PMI reading in September are consistent with our view that the euro area economy will fall into recession in the second half of 2023.”

In the UK, the UK’s comprehensive PMI in September was 48.5, expected to be 46.8, and the previous value was 46.8. The British services PMI in September was 49.3, compared with the expected 47.2 and the previous value of 47.2. Commenting on the British service industry, Tim Moore, director of S&P Global Intelligence Economics, said that in September, service industry activities remained negative as cuts in non-essential businesses and consumer spending dragged down sales. Survey respondents often say a combination of rising borrowing costs and depressed economic conditions has led to fewer new businesses. Book orders in September were also adversely affected by another decline in export sales, mainly due to weak demand across Europe.

It will take time to curb inflation

However, inflationary pressures in the euro area may have eased. Data released by Eurostat on Wednesday showed that producer prices (PPI) in the Eurozone rose slightly from the previous month as expected in August, but fell sharply year-on-year due to a sharp drop in energy prices. The Eurozone’s PPI rose 0.6% month-on-month in August, but fell 11.5% year-on-year, in line with economists’ expectations.

The rise in the Eurozone Producer Price Index (PPI) in August was largely due to higher energy prices brought about by soaring oil prices. Excluding this factor, producer prices across the industry actually fell by 0.2%.

De Guindos, deputy president of the European Central Bank, said in Cyprus on October 4, local time, that although inflation in the euro area continues to decline, it will still remain at a high level for a long time, and it will still take time to curb inflation. De Guindos warned that the negative impact of the European Central Bank’s monetary policy tightening is still penetrating into the real economy. The real estate market has slowed down, but the euro zone has not yet fully felt the impact of interest rate hikes. It is expected that tightening monetary policy will have a negative impact on the real economy. Much of the impact will be felt in the coming period.

Overall, although economic activity in the European region has picked up slightly, it is still in the contraction range, and with the inflation problem still unresolved, the European Central Bank and the Bank of England still seem determined to maintain restrictive policies. Its economic outlook remains bleak as demand continues to be squeezed by inflation and high interest rates.

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