Europe heads into recession as cost of living crisis deepens

People walk through the financial district of Canary Wharf as it was announced that UK consumer price inflation hit an annual rate of 9.0% in April in London, Britain May 18, 2022 .REUTERS/Kevin Coombs

LONDON, Sept 5 (Reuters) – The euro zone is almost certainly heading into recession, with surveys on Monday showing a deepening cost of living crisis and a bleak outlook that is causing consumers to be wary of spending.

Although there has been some easing in price pressures, surveys show they have remained elevated and the European Central Bank is under pressure as inflation is more than four times above its 2% target, reaching a record 9.1% last month. Read more

It faces the prospect of an aggressive rise in interest rates just as the economy enters a slowdown.

Rising borrowing costs would add to the woes of indebted consumers, but in a Reuters poll last week nearly half of economists polled said they expected an unprecedented 75 basis point rate hike from the ECB this week, while almost as many are forecasting a 50 basis point hike.

Despite those expectations, the euro fell below 99 US cents for the first time in 20 years on Monday after Russia said gas supplies from its main pipeline to Europe would remain shut indefinitely.

Mainland gas prices soared 30% on Monday, stoking scarcity fears and bolstering expectations of a recession and harsh winter as businesses and households are battered by sky-high energy prices .

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

“PMI surveys signal that the Eurozone is entering recession sooner than we previously thought, led by its largest economy, Germany, and we now see the Eurozone ‘benefiting’ from a longer recession, three quarters,” Peter Schaffrik told the Royal Bank. from Canada.

“The revision is mainly due to developments in energy prices which, even after falling in recent days, remain high and which means that the impact on household spending will be greater than expected so far. “

This prospect of recession has shaken investor sentiment in the monetary union and it fell in September to its lowest level since May 2020, another survey showed. Read more

Services activity in Germany, Europe’s largest economy, contracted for a second consecutive month in August as domestic demand came under pressure from soaring inflation and waning confidence, according to previous figures. Read more

Its economy is on course to contract for three straight quarters from this one, a Reuters poll suggested last week.

In France, the eurozone’s second-largest economy, the services sector lost further momentum and managed to post only modest growth, with purchasing managers saying the outlook was bleak. Read more

Italy’s services industry returned to modest growth, but in Spain activity grew at the slowest pace since January as businesses feared inflation would weigh on profits and customer demand. Read more

In Britain, the economy ended August on a much weaker base than previously thought, with overall business activity contracting for the first time since February 2021 in a clear signal of recession, showed its PMI.

Later on Monday, the country will learn who will become its next prime minister, tasked with trying to manage an economy facing a long recession alongside soaring inflation and industrial unrest. Read more

In Asia, surveys showed a strong rebound in China’s services sector, dampened slightly amid fresh COVID-19 surges, while in Japan the sector contracted for the first time in five months.

However, India’s dominant services industry grew faster than expected last month on strong demand expansion and continued easing of cost pressures. Read more

Reporting by Jonathan Cable; Editing by Hugh Lawson

Our standards: The Thomson Reuters Trust Principles.