Eurozone faces contraction as Olympics shine fades

Policymakers at the European Central Bank had hoped to tame inflation without pushing the eurozone economy into contraction. (Photo by Kirill KUDRYAVTSEV / AFP) (AFP)
Policymakers at the European Central Bank had hoped to tame inflation without pushing the eurozone economy into contraction. (Photo by Kirill KUDRYAVTSEV / AFP) (AFP)

Summary

The eurozone economy contracted as the third quarter drew to a close, while inflationary pressures cooled, according to a series of business surveys.

The eurozone economy contracted as the third quarter drew to a close, while inflationary pressures cooled, according to a series of business surveys released Monday.

The surveys suggest that a soft landing from the surge in inflation that accompanied Russia’s full-scale invasion of Ukraine could be in doubt.

Policymakers at the European Central Bank had hoped to tame inflation without pushing the eurozone economy into contraction, but there are growing signs that already anemic activity has weakened over recent months as borrowing costs remain high.

The euro dropped on the news, losing ground against the dollar and sterling in a sign traders expect the faltering economy to push the ECB to move faster to cut rates.

Private-sector activity shrank in September compared with a month earlier, according to S&P Global’s Composite Purchasing Managers’ Index published Monday. The composite index dropped to 48.9, falling below the 50 points that mark the threshold between expansion and contraction.

“After the stagnation that followed the energy price shock, the eurozone economy is now barely experiencing any recovery," said Bert Colijn, an economist at bank ING.

The surge in energy prices that followed Russia’s invasion of its neighbor cut short the eurozone’s recovery from the Covid-19 pandemic, but the currency area avoided a recession. However, the economy slowed in the three months through June as businesses cut back on investment in response to high borrowing costs.

Throughout the post-invasion stall, the eurozone’s jobs market has remained strong, with the unemployment rate at a record low. But the surveys suggested a turning point has been reached, with businesses shedding workers at the fastest rate since the end of 2020.

Weaker demand also helped cool price pressures. Businesses in the services sector, which has been a key driver of inflation in the eurozone, reported the smallest rise in input costs in three and a half years, while those costs fell for manufacturers. As a result, the prices that businesses charged their customers rose at their slowest rate since the Russia-Ukraine conflict sparked a lengthy cost-of-living crisis early in 2022.

The surveys carried few hints of a rebound over coming months, with new orders in decline.

“Considering the rapid decline in new orders and the order backlog, it doesn’t take much imagination to foresee a further weakening of the economy," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which commissioned the surveys.

Services activity, which in August was fueled by the Olympic Games in the French capital, slowed sharply with the index deteriorating to 50.5 from 52.9, pointing to the weakest rate of growth in seven months. France’s services sector, which had a busy August, fell back into contraction.

Manufacturing activity continued to weaken across the eurozone, with little sign of a rebound for the beleaguered factory sector. Germany, long Europe’s industrial powerhouse, saw a further slowdown in manufacturing, the surveys showed, with the measure of activity reaching its lowest point in a year.

Earlier this month, auto giant Volkswagen said it would consider unprecedented closures of factories in its home country in response to a bleak economic backdrop and fiercer competition from outside Europe. Weaker output and falling employment in Germany increase the risk that the eurozone’s largest economy is sliding into a technical recession, or two successive quarters of contraction, warned Claus Vistesen at Pantheon Macroeconomics in a note to clients.

There were signs of fading growth elsewhere among the world’s major economies, too. India recorded its slowest pace of growth so far this year, according to its own activity surveys. In the U.K., activity lost momentum both in services and manufacturing. The U.S., which has seen relatively robust expansion this year, is expected to book a broadly stable rate of growth when surveys for this month are set out later Monday.

Sputtering activity in the eurozone comes after the ECB cut its key interest rates for the second time this year earlier in September, and signs of a slowdown could push rate setters to act more decisively.

Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby

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