Europe heads for recession as cost of living crisis deepens

LONDON (Reuters) – The euro zone is almost certain to enter a recession as polls on Monday showed a deepening cost-of-living crisis and a bleak outlook that made consumers wary of spending.

While there has been some easing of price pressures, according to surveys, they remain elevated and the European Central Bank under pressure as inflation more than quadrupled its 2% target, reaching a record 9.1% last month. Read more

It faces the prospect of aggressive interest rate hikes as the economy enters a recession.

Increased borrowing costs will add to the problems for indebted consumers, but in a Reuters poll last week, nearly half of the economists surveyed said they expect an unprecedented 75 basis point interest rate hike from the European Central Bank this week, while many almost expected 50 basis points high.

Despite those expectations, the euro fell below 99 US cents for the first time in 20 years on Monday after Russia said gas supplies would remain closed indefinitely.

Gas prices on the continent rose as much as 30% on Monday, sparking fears of shortages, and boosting expectations of a recession and a harsh winter as businesses and households are hit by high energy prices.

The S&P Global Final Composite Index of Purchasing Managers’ Index (PMI), which is seen as a guide to economic health, fell to an 18-month low of 48.9 in August from 49.9 in July, below the initial estimate of 49.2. Anything less than 50 indicates a contraction.

“PMI surveys indicate that the eurozone is entering recession earlier than we previously thought, led by its largest economy in Germany, and we are now seeing the eurozone ‘enjoy’ a longer recession for three quarters,” said Peter Shavrik of Royal Bank. Canada.

“The revision is mainly due to developments in energy prices which, even after declining over recent days, are still high which means the impact on household spending will be greater than we have anticipated so far.”

Another survey showed that the possibility of a recession damaged investor sentiment in the currency union and fell in September to its lowest level since May 2020. Read more

Previous figures showed that services activity in Germany, Europe’s largest economy, contracted for the second month in a row in August as domestic demand came under pressure from rising inflation and eroding confidence. Read more

A Reuters poll last week showed that its economy is on course to contract for three consecutive quarters starting this quarter.

In France, the second largest economy in the Eurozone, the services sector lost further strength and only managed to post modest growth as purchasing managers said the outlook was bleak. Read more

Italy’s service industry is back on modest growth, but activity in Spain is expanding at the slowest rate since January, with companies worried that inflation will affect their profits and customer demand. Read more

The Purchasing Managers’ Index (PMI) showed that in Britain, the economy ended in August on much weaker grounds than previously thought, with general business activity contracting for the first time since February 2021 in a clear sign of recession.

Later on Monday, the country will learn who will become its next prime minister, charged with trying to manage an economy facing a prolonged recession along with horrific inflation and industrial unrest. Read more

In Asia, surveys showed that a strong recovery in the Chinese service sector faltered slightly amid a new outbreak of COVID-19, while in Japan the sector contracted for the first time in five months.

However, India’s dominant service industry grew faster than expected last month thanks to strong demand expansion and continued easing in cost pressures. Read more

(Jonathan Cable reports). Editing by Hugh Lawson

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