The eurozone is likely to enter a recession. Monday’s surveys showed that the cost of living is increasing and consumers are cautious about spending.
Although there was some relief in price pressures, the surveys showed that they were still high. The European Central Bank is also under pressure because inflation is at four times the target of 2% and reached a record 9.1% last week.
It is facing the possibility of raising interest rates aggressively as the economy goes into a downturn.
An increase in borrowing costs will only add to the problems of consumers with high debt. Yet, almost half of economists surveyed by Reuters last week said they expected a record 75 basis-point rate rise from the ECB this Week. Nearly the same number predicted a 50 bps increase.
Despite these expectations, the euro fell below 99 US cents on Monday for the first time in 20 years. This was after Russia announced that it would not allow gas to be transported from Russia to Europe.
On Monday, gas prices in Europe soared up to 30%, fueling fears of shortages. It also reinforced expectations for a recession.
S&P Global’s final composite PMI (Purchasing Managers’ Index) fell below the preliminary 49.2 estimates to 48.9 in August. This is an indicator of economic health. Anything below 50 is considered contraction.
“The PMI surveys indicate that the eurozone is entering recession earlier than we thought. This is led by Germany’s largest economy, and we now see that the euro region is ‘enjoying a longer, three-quarter recession,” stated Peter Schaffrik, Royal Bank of Canada.
“The main reason for the revision is due to energy prices, which even though they have fallen in recent days, have remained high. This means that household spending will suffer more than we had anticipated.”
The prospect of recession shook investor morale in the currency bloc, and it plummeted in September to its lowest level since May 2020, according to another survey.
Germany’s largest economy and services sector, Germany, saw its August activity contract for the second consecutive month. This was due to soaring inflation in Europe and low confidence in Germany.
According to a Reuters poll, the economy of this country is expected to contract for three quarters consecutively starting with this quarter.
France, which is the second-largest economy in the eurozone, saw the services sector lose more steam. It only managed modest growth, with purchasing managers stating that the outlook was grim.
In Italy, the services sector experienced modest growth. However, activity in Spain grew at the slowest pace since January. Companies were concerned that inflation would impact their profits and customers’ demands.
The UK’s economy ended August on a weaker foundation than originally thought. Overall business activity fell for the first time since February 2021, indicating a recession, its PMI indicated.
Monday will see the nation’s next prime minister. He will be charged with managing an economy that is in long-term recession, as well as dealing with high inflation and unrest.
Surveys in Asia showed that the services sector in China had experienced a slight rebound, despite fresh COVID-19 flare-ups. In Japan, however, the sector contracted for the first time in five years.
However, India’s dominant service industry grew faster last month than expected due to an expansion of demand and continued easing of cost pressures
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