EU business activity points to recession

Business activity in the euro area continues to decline – the composite PMI, according to S & P Global, in September, according to preliminary data, amounted to 48.2 points against 48.9 points a month earlier (this is the minimum for the last 20 months). The composite indicator has been falling for the third month in a row, with the exception of the pandemic period, such values ​​were observed only in 2013. Recall that the indicator value above 50 points indicates an increase in activity, below 50 points indicates its slowdown. In the service sector, the indicator amounted to 48.9 points (49.8 points a month earlier), the indicator is below the bar of 50 points for the second month, in industry – 48.5 against 49.6 points (including the output sub-index fell from 46.5 to 46.2 points), the index value below 50 points is recorded for the fourth month in a row.

The most pronounced decline is in Germany: here the composite index fell from 46.9 to 45.9 points (this is the lowest value since May 2020, and excluding this period, since June 2009). In industry, however, the decline slowed as supply chains improved and logistics costs fell. In France, the composite indicator rose from 50.2 to 51.2 points – the service sector compensated for the decline in industry, but growth rates in the third quarter will be lower than in the second, the index compilers say. Inflation is weighing on demand, rising energy bills are pushing up company costs as new orders for goods and services are down for the third month in a row, backorders are falling, and overcapacity is growing, S&P says. Employment growth in August was the lowest in 17 months. Companies’ expectations for the coming year are also deteriorating, but the situation differs by country: Germany recorded the most pronounced decline, while in France, on the contrary, expectations improved.

The current fall in PMI is equivalent to a contraction in GDP of about 0.1% in the third quarter, while worsening expectations suggest a more significant decline in the fourth quarter, which will mean the euro area will enter a recession, S&P notes. In April-June quarterly GDP growth amounted to 0.8%, in the first – 0.5%. ING Bank notes that the economy of the currency bloc is in a “stagflationary environment”, and expects that the ECB, despite the decrease in activity, will continue to raise rates.

Tatyana Edovina