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Dismal business survey pushes euro to 20-year low against dollar

The euro hit a new 20-year low against the dollar on Friday after a benchmark survey of eurozone companies showed business activity suffered its biggest decline in 20 months, while price pressures rose at the sharpest pace since June.

The eurozone S&P Global Composite Purchasing Managers Index, a key indicator of business conditions, fell 0.7 points to 48.2, its lowest level since January 2021 and for the third straight month below the critical 50 mark that separates growth from contraction.

The readings are the strongest evidence yet that the energy crisis caused by Russia’s invasion of Ukraine has pushed the bloc into recession, with inflation at an all-time high.

Eurozone bond and stock prices tumbled while the euro fell 0.9% against the dollar to 97.5 cents on Friday, its lowest level since October 2002. The Dax-40 index of leading German stocks fell 1.4% to its lowest level in nearly two years.

The slowdown underscores the challenge facing the region’s monetary policymakers, who are expected to continue raising borrowing costs to fight inflation despite the slowdown. “The stagflation shock is real and it’s getting worse,” said Klaus Wiestesen, an economist at Pantheon Macroeconomics.

The European Central Bank has raised rates by 125 basis points to 0.75% since the start of the summer and is expected to raise borrowing costs again at its meetings in October and December.

Russia’s invasion of Ukraine is squeezing natural gas supplies to Europe, causing record inflation in the eurozone, cutting household spending and hurting industrial production.

Economists at Deutsche Bank cut their forecasts this week, saying the energy crisis has already caused the eurozone economy to contract and predict it will contract cumulatively by 3% from the third quarter of this year to the second quarter of 2023.

The PMI results, as expected by economists polled by Reuters, although Germany was weaker than France, underlined the challenges facing the eurozone economy after businesses reported falling factory production, reduced new orders, a sharp rise in energy prices and a sharp drop in expectations .

“The study’s forecasts point to an intensification of the economic downturn in the eurozone in the fourth quarter, which raises the likelihood of a recession in the region,” said Chris Williamson, chief business economist at S&P Global.

Purchasing Managers Index line chart showing approaching recession as business activity declines in the euro area

The 19-country bloc did better than expected this year, up 0.8% in the second quarter on the back of a recovery in tourism. However, most economists believe it is already slowing sharply, with many of them warning of a recession this winter.

The PMI survey painted a bleak picture of business conditions late in the third quarter, with producers reporting a fourth consecutive decline in output and “some indication that changes in the energy market are also limiting production capacity.” Employment growth has not changed since August, when it slowed to a 17-month low.

New bookings in services also declined at a faster rate as more consumers, facing rising energy and food prices, stayed at home to save money. Companies across all sectors reported their sharpest cost increases since June, driving prices for goods and services to accelerate “as firms sought to protect margins.”

“Growth in services in the euro area is now noticeably slowing down, with inflation further impacting consumer purchasing power,” said Katharina Koenz, an economist at Oxford Economics. “While the risk of winter energy shortages has eased somewhat, it remains a key risk to the outlook.”

Supply chain restrictions eased as delivery times lengthened at the slowest pace since October 2020. But Williamson said that high inflation “has not only hit demand, but has in some cases curtailed manufacturing output and activity in the service sector.”

Some of Europe’s biggest energy consumers, from steel to chemical companies, are cutting production, and business leaders are warning that a sharp rise in prices could undermine the region’s competitiveness.

The PMI for Germany fell 1 point to 45.9, the lowest level since May 2020 shortly after the pandemic hit Europe, as a sharper-than-expected decline in the services index added to the ongoing fall in manufacturing. “Germany will be hit harder than most other countries in the coming quarters as high energy costs take a toll on energy-intensive industries as well as household budgets,” said Jack Allen-Reynolds, an economist at Capital Economics.

French PMI edged up 0.8 points to a two-month high of 51.2, beating lower expectations as activity was supported by a recovery in services.

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