The euro hit a new 20-year low against the dollar on Friday after a benchmark survey of euro-zone companies showed activity undergoing its biggest contraction in 20 months, while price pressures mounted at their sharpest pace since June.
S&P Global’s Eurozone Flash Composite purchasing managers index – a key gauge of business conditions – fell 0.7 points to 48.2, the lowest level since January 2021 and the third straight month below the crucial 50 separating growth and contraction.
The reading is the strongest evidence to date that the energy crisis, triggered by the Russian invasion of Ukraine, has pushed the bloc into recession and pushed inflation to record highs.
Eurozone bond and stock prices plunged as the euro fell 0.9 percent against the dollar to 97.5 cents on Friday, the lowest level since October 2002. German 10-year benchmark interest rates rose for the first time in 11 years. year above 2 percent, while the Dax-40 stock index of top German companies fell 1.4 percent to its lowest level in nearly two years.
The slowdown in activity highlights the challenge for the region’s monetary policymakers, who are expected to continue to raise borrowing costs to fight inflation despite the slowdown. “The stagflationary shock is real and it’s getting worse,” said Claus Vistesen, an economist at Pantheon Macroeconomics.
The European Central Bank has raised interest rates by 125 basis points to 0.75 percent since the start of the summer and is expected to raise borrowing costs again during its October and December meetings.
Russia’s invasion of Ukraine is depressing natural gas supplies to Europe, triggering record inflation in the eurozone, eroding household spending and hitting industrial production.
Economists at Deutsche Bank lowered their forecasts this week, saying the energy crisis had already contracted the eurozone economy and predicted it would shrink by a cumulative 3% from the third quarter of this year to the second quarter of 2023.
The PMI results came as expected by economists polled by Reuters – even though Germany was weaker than France – and underlined the challenges facing the euro-zone economy after companies reported declining factory output, dwindling new orders, rising energy prices and plummeting expectations.
“The study’s forward-looking indicators point to a stronger economic slowdown for the eurozone in the fourth quarter, increasing the likelihood of the region slipping into recession,” said Chris Williamson, chief business economist at S&P Global.
The 19-nation bloc has outperformed expectations so far this year, growing 0.8 percent in the second quarter thanks to a recovery in tourism. However, most economists think it is already slowing sharply and many of them are warning of a recession this winter.
The PMI survey painted a bleak picture of business conditions at the end of the third quarter, with manufacturers reporting a fourth consecutive decline in factory output and “some evidence of energy market developments that are also limiting production options.” Job growth was unchanged from August, when it slowed to a 17-month low.
New orders for services also fell at a faster rate as more consumers faced with rising energy and food costs stayed at home to save money. Companies across all sectors reported the sharpest increase in costs since June, leading to accelerated growth in prices for goods and services “as companies tried to protect margins”.
“Services growth in the eurozone is now slowing significantly and inflation is weighing further on consumer purchasing power,” said Katharina Koenz, an economist at Oxford Economics. “And while the risk of winter energy shortages has decreased somewhat, it remains a key risk to the outlook.”
Supply chain constraints eased as delivery times lengthened at the slowest pace since October 2020. But Williamson said high inflation “not only hit demand, but in some cases also limited manufacturing output and the service sector.” “.
Some of Europe’s biggest energy consumers, from steel to chemical companies, are cutting production, and business leaders warn that rising prices threaten the region’s competitiveness.
The PMI for Germany fell 1 point to 45.9, its lowest level since May 2020 shortly after the pandemic hit Europe, as a sharper-than-expected decline in the services index contributed to a continued decline in the industry. “Germany will suffer more than most in the coming quarters as high energy costs weigh on energy-intensive industry as well as household budgets,” said Jack Allen-Reynolds, an economist at Capital Economics.
The French PMI rose 0.8 points to a two-month high of 51.2, shaking expectations for a decline as activity was boosted by a rebound in the services sector.