Grim Euro-Area Private Sector Suggests Quarterly Contraction

An index based on surveys of purchasing managers by S&P Global showed a fourth consecutive month of falling output, hitting 47.1. While that’s a slight improvement on August, the reading is clearly below the 50 level that indicates contraction. Economists had predicted a drop to 46.5.

Despite dodging a recession in the wake of Russia’s invasion of Ukraine, the euro region is struggling under the weight of higher energy prices, a surge in borrowing costs and waning demand in export markets like China. While there’s agreement that the currency bloc is going through a rough patch, the European Central Bank’s latest forecasts still see the third quarter as a stagnation — not a contraction — and the economist consensus is for 0.1% growth.

Speaking on Friday, ECB Chief Economist Philip Lane said that “the overall environment remains not fragile.”

“Because of the pandemic, household’s balance sheets look in better shape than normal, same for corporates — so, that toxic mix you need in order to trigger a deep recession is not present,” he told Yahoo Finance in an interview. “We do expect to see a pickup next year and the year after which will bring the European economy to grow.”

The region’s two biggest economies were the key drivers of the downturn in activity, according to S&P Global. While the slump eased in Germany, it deepened in France. Economists had expected momentum in both countries to remain broadly stable.

The euro initially fell as much as 0.4% to $1.0615, the lowest since March 17, before paring much of that drop. The currency is heading for a 10th week of losses against the greenback, with markets betting the European economy can’t withstand higher rates. German bonds clung onto their advance, leaving 10-year government borrowing costs two basis points lower at 2.72%, near a 12-year high touched Thursday. The yield on two-year peers fell one basis point to 3.24%.

What Bloomberg Economics Says…

“The unexpected improvement in the PMI survey is small and activity remains weak. The European Central Bank has still in all likelihood finished increasing interest rates and the risk of a hard landing remains elevated”

—David Powell, senior euro-area economist. Click here for full REACT

Separate S&P Global data for the UK showed private sector companies shed workers at the fastest pace since the pandemic and the depths of the financial crisis more than a decade ago, adding to the risk of a recession. The gauge slipped to 46.8 in September from 48.6 the month before, the sharpest decline in output since January 2021. The reading was worse than economists expected.

In Germany, the performance of the services sector was a “pleasant surprise” as it only contracted marginally this month, S&P Global said. Manufacturing, which has been suffering from a slowdown in the global economy and higher interest rates, led the decline in overall activity.

The numbers for the country’s important industrial sector nonetheless indicate that “things aren’t going downhill as fast as before, with the decline in new orders slowing down,” de la Rubia said in a statement. “In addition, the reduction in purchasing activity is losing momentum.”

In France, both services and manufacturing worsened, sending private-sector activity down by the most since November 2020. There were widespread reports of weak demand in both sectors, and confidence regarding the next 12 months weakened noticeably, S&P Global said.

Faster Hiring

He added that inflation is still lurking in France, entirely driven by services, with “not much sign of an impact” yet from the government’s decision to impose price caps on certain food products from July.

Still, the euro-area numbers aren’t “all doom and gloom” as firms are hiring at a somewhat faster pace than the previous month, de la Rubia said. “Thus, companies still show some resilience and optimism in the face of lower demand.”

US figures due later on Friday are expected to show slight growth. Earlier numbers from Australia and Japan indicated expansion, though both countries saw a worsening slump in manufacturing.

—With assistance from Alice Gledhill, Joel Rinneby, Mark Evans and Tom Rees.

(Updates with ECB’s Lane in fifth paragraph.)