The euro hit a fresh 20-year low against the dollar on Friday after a benchmark survey of euro-zone businesses showed business activity suffered the biggest contraction in 20 months, amid price pressures at the fastest pace since June increased.
S&P Global’s composite Eurozone Purchasing Managers’ Index — a key indicator of business conditions — fell 0.7 points to 48.2, its lowest since January 2021 and a third straight month below the crucial 50 mark, the growth of contraction separates.
The reading is the strongest evidence yet that the energy crisis caused by Russia’s invasion of Ukraine has plunged the bloc into recession and pushed inflation to record highs.
Euro-zone bond and stock prices tumbled, while the euro fell 0.9 percent against the dollar to 97.5 cents on Friday, its lowest since October 2002. Germany’s 10-year benchmark yield rose for the first time since March 11 years, while The Dax 40 stock index of German blue-chip companies fell 1.4 percent to its lowest level in almost two years.
The slowdown in economic activity underscores the challenge facing the region’s policymakers, who are expected to continue raising borrowing costs to fight inflation despite the slowdown. “The stagflation shock is real and growing,” said Claus Vistesen, economist at Pantheon Macroeconomics.
The European Central Bank has hiked interest rates by 125 basis points to 0.75 percent since the start of the summer and is expected to raise borrowing costs again at its October and December meetings.
Russia’s invasion of Ukraine is squeezing natural gas supplies to Europe, causing record inflation in the eurozone, eroding household spending and hurting industrial production.
Economists at Deutsche Bank lowered their forecasts this week, saying the energy crisis has already caused the euro-zone economy to start contracting and predicting it will contract by a total of 3 percent from the third quarter of this year to the second quarter of 2023 will.
The PMI results were as expected by economists polled by Reuters – although Germany was weaker than France – and underscored challenges relative to the eurozone economy after companies reported falling factory production, falling orders, rising energy prices and falling expectations.
“The survey’s forward-looking indicators point to a steeper eurozone economic decline in the fourth quarter, increasing the likelihood of the region sliding into recession,” said Chris Williamson, chief operating officer at S&P Global.
The bloc of 19 countries has performed better-than-expected so far this year, growing 0.8 percent in the second quarter thanks to a rebound in tourism. However, most economists believe it is already slowing sharply, and many are warning of a recession this winter.
The PMI survey painted a bleak picture of business conditions at the end of the third quarter, with manufacturers reporting a fourth consecutive decline in factory output and “some evidence that energy market developments are also limiting production capacity.” Job growth was flat from August when it slowed to a 17-month low.
New orders for the service business also fell more sharply as more consumers, faced with rising energy and food costs, stayed home to save money. Firms across all sectors reported the sharpest rise in costs since June, leading to accelerated rises in the price of goods and services “as firms sought to protect their margins.”
“Services growth in the eurozone is now slowing significantly and inflation continues to weigh on consumer spending power,” said Katharina Koenz, economist at Oxford Economics. “And while the risk of power shortages has diminished somewhat over the winter, it remains a key risk to the outlook.”
Supply chain constraints eased as delivery times lengthened at a slower rate than since October 2020. Williamson said, however, that high inflation is “not only affecting demand, but in some cases also constraining activity in the manufacturing and service sectors.”
Some of Europe’s biggest energy consumers, from steel to chemical companies, are cutting production and business leaders are warning that rising prices could undermine the region’s competitiveness.
Germany’s PMI fell 1 point to 45.9, its lowest level since May 2020, shortly after the pandemic hit Europe, as a stronger-than-expected decline in the services index contributed to a prolonged contraction in manufacturing. “Germany will suffer more than most in the coming quarters as high energy costs weigh on both energy-intensive industries and household budgets,” said Jack Allen-Reynolds, economist at Capital Economics.
France’s PMI rose 0.8 points to a two-month high of 51.2, beating expectations of a decline as activity was boosted by a recovery in the services sector.