Economic activity in the euro area slumped for a second month, suggesting that fears of recession may already prevail as record inflation stifles demand and weakness seeps into more sectors. Eurozone flash PMI surveys are important as they provide more information about the likelihood of economies going into recession. The impact of the rise in energy costs also indicates the possibility of a recession. The August composite PMI survey provides more insight into the challenges faced by businesses in the eurozone economy as rising energy costs and the risks of Russia cutting off gas supply threaten to plunge the region into recession.
The composite Purchasing Managers Index (PMI) in the Eurozone decreased by 0.7 points to 49.2 points in August. The services sector PMI data, which was 51.2 in July, decreased to 50.2 in August. Manufacturing industry PMI, on the other hand, decreased from 49.8 points in July to 49.7 points in August. Thus, the manufacturing PMI reached its lowest level in the last 26 months. The survey at least revealed some signs that price pressures are peaking as growth in input and output costs softens.
Germany was in a particularly weak spot, recording the sharpest drop in production since June 2020 as it rushed to reduce its reliance on Russian natural gas amid declines in shipments after the war in Ukraine. Meanwhile, activity in France contracted for the first time in a year and a half. Other parts of the world are also experiencing declines. The data showed activity contracted in Japan and Australia, although economists had predicted improvements in manufacturing and services in the US and the UK remained in expansion zone.
Although the decline in August was driven by manufacturing, the post-quarantine recovery in services such as tourism has nearly stalled as consumers face spikes in energy and food costs. While the growth in the service sector, which is almost in the neutral zone, affects the general activity negatively, the decrease in spending ability caused by inflation may further suppress the demand in this direction.
Headline reading fell to 49.9 in July, the first contraction since the start of 2021. The ZEW and Sentix indices were the first of the major surveys to be published for August. Both fell in July and were weak in August. Surveys pointed to a decline in manufacturing activity, while expansion in the services sector slowed. The August reading seems to paint a similar and worse picture.
The euro area economy is expected to post a milder growth in 3Q22, after 0.7% recorded in 2Q22. A recession is likely from Q422 as pressures from energy constraints increase. As uncertainty about the outlook is high and economic momentum wanes, it presents a dilemma for the European Central Bank, which has raised interest rates to curb the highest inflation in decades.
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