Worsening Euro Zone Business Conditions Fuel Recession Concerns

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European stock markets fell on Monday as worries about a global economic slowdown intensified after new data showed the pace of decline in eurozone businesses was worse than expected in July. The HSOB Flash Eurozone Composite PMI, which covers around 2,000 firms from banks to cafes, dropped to 48.9 last month from 49.1 in June, below the 50 mark that separates growth from contraction and well below all forecasts in a Reuters poll which had predicted a dip to 49.3.

The decline was broad-based, with the euro zone’s two biggest economies – Germany and France – both in contractionary territory and will likely add to fears that the bloc will slip back into recession in the fourth quarter of this year. The survey also indicated that the European Central Bank’s sustained campaign of interest rate rises was starting to hit consumer spending.

A subindex for the service sector – which accounts for more than half of the economy – edged up to 52.8, above a preliminary estimate and slightly above the reading in November but still below the 50 mark that indicates contraction. The survey also indicated that the deterioration in manufacturing was easing. However, the PMI subindex for factory output, which feeds into the overall PMI, dropped to 49.6 last month from 49.3, the lowest since February 2021 and well below a forecast for a fall to 49.4.

Several companies blamed weaker domestic demand for the fall in services, while others pointed to lower construction activity. Manufacturers cut prices for the second consecutive month and saw input costs rise at their weakest pace since May 2021.

A bleak outlook for the eurozone economy will likely make investors even more wary of taking prominent positions. Investors are already worried that a combination of rising interest rates and higher inflation will push the bloc into a recession, and a survey on Thursday that showed consumer confidence fell to its lowest since January weighed heavily on the market.

The European Central Bank is widely expected to raise interest rates again this week after a rate-setting meeting on Thursday, and it has hinted that more hikes could be coming. The bank has raised rates twice this year and aims to keep inflation close to, but below, its target of just below 2.0%.

Data on Monday also showed that eurozone unemployment fell to its lowest level in almost two years in October. However, the rate of decline accelerated, reinforcing the view that the eurozone is headed for recession. Official unemployment figures will be released on Wednesday. The euro rose to a fresh six-month high against the dollar on the news, while the yen was weaker against the greenback. The euro was trading at $1.1568 shortly after publishing the PMI data. It later slipped to $1.1543 as the euro was weighed down by investor expectations of another rate rise this week.


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