Eurozone edges nearer to recession while UK economy ‘stalls’

The European economy has edged closer to recession, while the UK is on the brink of slipping into negative growth, closely watched surveys out today reveal.

A snapshot of the eurozone’s respective economies showed high inflation and the European Central Bank’s (ECB) efforts to tame it with interest rate rises is cooling activity.

Hamburg Commercial Bank and S&P Global’s flash composite purchasing managers’ index (PMI) for the 20 members using the euro slipped to 48.9 in July, down from 49.9 in June.

The reading was below market expectations and the weakest in eight months.

It means the index has slid further below the 50 point threshold that separates growth and contraction, signalling Europe is getting ever closer to a recession.

Britain’s composite PMI meanwhile also softened but remains just about above the contraction line at 50.7 in July. 

“The UK economy has come close to stalling in July which, combined with gloomy forward-looking indicators, reignites recession worries,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

A huge contraction in Eurozone factory activity dragged overall growth into negative territory in the bloc. Manufacturing output fell to 42.7, its weakest level in 38 months and down from 43.4.

Europe’s downturn is gathering pace…

Russia’s invasion of Ukraine sent raw material prices – especially oil and gas – soaring, making some factory activity loss making and prompting firms to curb production.

Germany – which had for decades relied on cheap Russian gas to propel its crucial industrial sector – has suffered a sharp fall in manufacturing output. The country’s factory PMI slid to 38.8 in July from 40.6. Its composite measure slid into shrinkage at 48.3.

A combination of sky high inflation for nearly two years and the ECB lifting borrowing costs from rock bottom levels to 3.5 per cent – their highest level since 2001 – has sent a chill through demand in Europe.

While inflation has fallen much quicker than in Britain to 5.5 per cent, the ECB is this Thursday still tipped to lift borrowing costs 25 basis points, although that may be the monetary authority’s final rise.

Similar dynamics are gripping the UK economy. The Bank of England has lifted rates 13 times in a row to five per cent, while inflation has reached multi-decade highs over the past year. The Bank is expected to back three more rate increases, taking them to a peak of 5.75 per cent.  

UK inflation fell faster than expected last month yo 7.9 per cent from 8.7 per cent.

So far, the continent’s services sector has avoided contracting, with the July PMI reading coming in at 51.1, although that too was down from 52. Experts warned that trend could soon reverse.

… but UK isn’t fairing much better

“The eurozone economy will likely move further into contraction territory in the months ahead, as the services sector keeps losing steam,” Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said.

“Further adding to the gloomy outlook is the fact that both the new business and outstanding business PMI indices for services have fallen into shrinking territory for the first time since the turn of the year,” he added.

The PMI figures are a more timelier measure of economic activity that proceed official GDP estimates. This month’s further deterioration suggests Eurostat’s – the organisation that measures official output – early calculations for third quarter growth may be negative.

The common currency bloc was thought to have tumbled into an official recession in the first quarter of this year after Eurostat revised down an first estimate of output. However, last week the stats agency, in another revision, said GDP flatlined in the first quarter.

Analysts said today’s surveys indicate a contraction is still on the cards. 

“The eurozone PMI suggests contracting economic activity at the start of the third quarter. Overall, this fits a trend of weakening survey indicators over recent months and increases the recession risk for the bloc,” Bert Colijn, senior Eurozone economist at ING, said.