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Euro zone ‘likely’ entering recession as business activity contracts 

The Euro Zone is likely entering a recession and the business activity is declining ‘faster than feared’ according to reactions to indices released today. 

The Financial Times said that a “survey of companies finds orders have fallen for a second consecutive month” while the contraction in business activity continued at the fastest pace in nearly two years in the month of October.

S&P Global’s Purchasing Managers’ Index shows “business activity down for a second month running as service sector growth grinds to a near-halt.”

“The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index dropped to 49.2 in August, from 49.9 in July, according to the ‘flash’ reading,” the analysts said. It was the lowest reading since February 2021.

“The overall drop in output was again driven by a contraction in the manufacturing sector, where production fell for the third month running and at a solid pace,” they reported.

“That said, the service sector barely registered any improvement in activity during August as the rate of expansion slowed for the fourth consecutive month to the softest since the sector returned to growth in April 2021.”

“The overall reduction in business activity in the euro area was mainly centred on the largest national economies,” they continued.

“Germany posted the sharpest decline in output since June 2020 as manufacturing production continued to fall markedly and the contraction in services activity accelerated. Activity in France decreased for the first time in a year-and-a-half, reflective of a sharp drop in manufacturing output and softer growth of services activity. ”

Commenting on the flash PMI data, Andrew Harker, Economics Director at S&P Global Market Intelligence said that the latest PMI data for the eurozone point to an economy in contraction during the third quarter of the year.

“Cost of living pressures mean that the recovery in the service sector following the lifting of pandemic restrictions has ebbed away, while manufacturing remained mired in contraction in August, seeing another record accumulation of stocks of finished goods as firms were unable to shift products in a falling demand environment. This glut of inventories suggests little prospect of an improvement in manufacturing production any time soon.”

“Declining output is now being seen across a range of sectors, from basic materials and autos firms through to tourism and real estate companies as economic weakness becomes more broad based in nature.”

“The rebuilding of workforces following the pandemic is also losing steam, with firms increasingly reluctant to hire additional staff given falling new orders and relatively weak business sentiment,” he said.

“Businesses are at least continuing to see weaker rises in their costs, in turn increasing their selling prices at a softer pace. This should help to feed through to slower consumer price inflation later in the year, although it appears that any alleviation to the inflation situation is coming too late to provide any real support to demand. The remainder of 2022 is therefore looking to be one of struggle for firms across the eurozone.”

“The flash PMIs for October provide yet more evidence that the euro zone is sliding into quite a deep recession but that inflationary pressures remain intense,” Andrew Kenningham at Capital Economics told Reuters. “The limited country breakdown available so far shows that Germany is in much deeper trouble than France.”

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