Accessibility links

Breaking News

Euro Zone Economy Sliding

FILE: Euro coins are seen in this illustration. Taken November 9, 2021

The downturn in the euro zone economy has deepened as high inflation and fears of an intensifying energy crisis hit demand, adding to evidence the bloc is heading for a winter recession.

S&P Global's final composite Purchasing Managers' Index (PMI) for the euro zone, seen as a good guide to economic health, fell to a 23-month low of 47.3 in October from September's 48.1, albeit just above a preliminary 47.1 estimate.

Anything below 50 indicates contraction.

"The final euro zone PMIs for October paint a clear picture of falling activity and sky-high inflation," said Jack Allen-Reynolds at Capital Economics.

"While it does not yet point to the 0.5% q/q contraction that we have penciled in for Q4, the new orders and future output PMIs suggest that worse is to come."

Asked what type of recession the euro zone would endure, 22 of 46 respondents in an October Reuters poll said it would be short and shallow - while 15 said it would be long and shallow. Eight said it would be short and deep and only one said it would be long and deep.

Inflation in the 19 countries using the euro currency surged more than expected last month, reaching 10.7% and more than five times the European Central Bank's target. Consequently, the ECB is likely to press ahead with more interest rate rises, which will add to the burden faced by indebted consumers.

While people in the United States have howled about the inflation they have experienced, the figures show that European Union countries have been hit harder.

In response to inflation. The ECB was the last among its peers to begin raising rates in this cycle, waiting until July. By year-end the deposit and refinancing rates were forecast to be at 2.00% and 2.50% respectively.

In contrast, the United States' Federal Reserve, which began hiking in March, raised interest rates by three-quarters of a percentage point again on Wednesday in what has become the swiftest tightening of U.S. monetary policy in 40 years.

The Russia-Ukraine conflict, with its impact on energy supplies and prices helping to drive Europe's inflation rate, has no signs of abatement or resolution.

With winter nearing, several European governments have announced new measures to limit the increase in prices.

"The input and output price PMIs remain extremely strong. While they have fallen from their recent peaks, they are a very long way above their previous highs," Allen-Reynolds said.

"The upshot is that Europe looks set for a painful winter of weak activity and strong inflation," he added.