Eurozone downturn looms as business orders fall

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Eurozone businesses were hit by the biggest fall in new orders for almost three years, as price pressures cooled and demand for hiring new staff remained weak, increasing fears of an economic contraction in the bloc.

The HCOB flash composite purchasing managers’ index, a key measure of activity at companies across the 20-country eurozone, rose to a two-month high of 47.1 in September, from 46.7 last month, after a downturn in services activity eased slightly. But the index remained well below the 50 mark that separates contraction from expansion amid a sharp decline in new orders, especially in manufacturing.

Investors bet the grim economic outlook made it more likely that last week’s quarter-point interest rate rise by the European Central Bank would be its last. The euro fell 0.2 per cent against the US dollar to a six-month low of $1.064 after the flash PMI release.

The PMI reading was above the slight decline to 46.5 forecast by economists in a Reuters poll. But economists said the survey still showed economic activity was weakening after output barely grew over the past nine months.

“A recession is becoming increasingly clear in the euro area,” said Christoph Weil, an economist at German lender Commerzbank. “A further increase in the key interest rate is becoming increasingly unlikely.”

There was an even sharper drop in UK business activity, according to the S&P Global/Cips purchasing managers’ index, which fell to 46.8 in September, down from 48.6 in August, the lowest for 32 months.

ECB chief economist Philip Lane said in a speech in New York shortly before the PMI data was released that “risks to economic growth are tilted to the downside” as manufacturing activity was “set to remain weak” and there were “clear signs of a slowdown” in services. 

Lane gave his strongest signal that the ECB’s deposit rate has peaked at 4 per cent, saying the bank’s models showed that as long as it was “maintained for a sufficiently long duration, [it] should be consistent with a return of inflation to target within the projection horizon”. 

The PMI survey indicated that the downturn in eurozone services eased slightly in September, while it found evidence of further output falls in manufacturing, which “has decreased continuously since the middle of 2022”. 

“The numbers for PMI services in the eurozone paint a grim picture, but it’s not all doom and gloom,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, pointing out that hiring by services companies picked up slightly in September. “Having said this, we expect the eurozone to enter a contraction in the third quarter.”

Companies said their costs increased at a faster pace in September, mainly due to rising wages in the services sector and higher fuel costs. But in a more encouraging sign for the ECB’s efforts to tame inflation, “weakening demand” led companies to increase their selling prices at the slowest pace since February 2021. 

“Manufacturing output prices fell at a marked and accelerated pace, while services charge inflation eased to a 25-month low”, said S&P Global, which compiled the survey. French business activity weakened more than expected, as its PMI score fell to a near-three-year low of 43.5, while the decline in German activity eased slightly as its PMI score rose to 46.2.

Lane said the contribution of higher profit margins to inflation “moderated” in the first half of this year, “suggesting that the rising wage pressures are starting to be absorbed by firms”.

Melanie Debono, an economist at research group Pantheon Macroeconomics, said: “We continue to expect services inflation to ease enough over the coming months to convince the ECB to not hike [interest rates] further.” 

Hiring activity at eurozone companies picked up slightly this month, but was still the second-slowest rate in the past 32 months. Job creation slowed as “spare capacity and reduced confidence in the outlook meant that companies were again cautious in their approach to hiring”, S&P said. 

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