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Slowdown in business activity drives euro zone into recession

In the last quarter of 2023, private sector activity in the euro zone started with upsetting figures indicating a possible recession in the region – Luxembourg Times.

The S&P Global Purchasing Managers’ Index slowed in October, falling to 46.5, below the 50 level that separates growth and contraction. Economists, including Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, had expected a slight improvement to 47.4.

In the euro zone, things are moving from bad to worse. We wouldn’t be caught off guard to see a mild recession in the euro zone in the second half of this year, with two back-to-back quarters of negative growth.

The euro fell 0.1 per cent against the dollar to $1.0655, breaking a three-day streak of gains. Bonds maintained their earlier gains, with Germany’s 10-year bond yield falling as much as 8 basis points to 2.79 per cent. Bond yields are trading about 20 basis points below the peak reached earlier this month.

Rising energy prices as a result of the conflict in the Middle East risk exacerbating the economic situation in the European region. The French and German economies struggled at the start of the fourth quarter, with private sector activity continuing to contract amid weak demand and higher borrowing costs.

Euro-area banks have further tightened credit standards due to higher borrowing costs and a deteriorating economic backdrop, according to the ECB statement on Tuesday.

Bloomberg Economics’s Nowcast reported that third-quarter data due out in a week will likely show eurozone output contracted 0.1 per cent. After a record cycle of 10 consecutive interest rate hikes, policymakers have signalled they will hold down borrowing costs for some time.

The labour market has also shown a bit of trouble.

“Service providers’ hiring came almost to a standstill. Manufacturing companies are not just continuing to cut staff, they are ramping up job-shedding plans. This led for the first time since January 2021 to an overall decrease in employment.”

In the UK, output was still contracting in October, leading to a hiring freeze and staff cuts.

De la Rubia said the German data pointed to another recession and confirmed the widespread view that the country would also face contraction throughout the year.

Germany is kicking off the final quarter on a sour note. Manufacturing output continues to fall at a steep rate, and activity in the services sector, which grew last month, swung into the red again.

In France, manufacturing activity contracted at a faster pace due to weak demand and the sectoral expectations index fell to its lowest level in three and a half years. Meanwhile, French price data showed that the ECB should not declare victory over inflation so early.

“Price indexes are in perilous territory. The pace of increase in input prices rose for the second month in a row amid rising fuel prices and reports of sustained wage pressures.”

According to forecasts, stagnation in the US is to be expected. Japan’s index earlier fell below 50, while Australia’s economy suffered its biggest contraction since January 2022.

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