A series of business surveys released on Monday showed the euro zone economy contracted and inflationary pressures eased as the third quarter drew to a close.
The survey suggests that a soft landing from the inflationary surge that accompanied Russia’s all-out invasion of Ukraine may be in doubt.
European Central Bank policymakers had hoped to tame inflation without pushing the euro zone economy into a contraction, but there have been growing signs that already sluggish economic activity has weakened further in recent months as borrowing costs remain high.
The euro weakened on the news, dropping against the dollar and pound, a sign that traders expect the weak economy to prompt the ECB to cut interest rates more quickly.
Private sector activity contracted in September from the previous month, according to the S&P Global Composite Purchasing Managers’ Index released on Monday. The composite index fell to 48.9, below the 50-point mark that separates expansion from contraction.
“After the slump following the energy price shock, the euro zone economy has now barely recovered,” said Bert Collin, an economist at ING Bank.
The euro zone’s recovery from the coronavirus pandemic was short-lived due to high energy prices caused by Russia’s invasion of its neighbour, but it avoided a recession. But the economy slowed in the three months to June as companies cut investment in response to higher borrowing costs.
The euro zone’s job market has held up well throughout the post-invasion downturn, with unemployment at a record low, but surveys suggest a tipping point has been reached, with companies cutting staff at their fastest pace since the end of 2020.
Weakening demand also helped ease price pressures. Services-sector businesses, which have been the main driver of euro zone inflation, recorded the lowest input cost increase in three-and-a-half years, while manufacturing saw input costs fall. As a result, prices charged by companies to customers rose at the slowest rate since the start of 2022 when the Russia-Ukraine conflict triggered a protracted cost-of-living crisis.
The survey showed a decline in new orders and little indication of a recovery in the coming months.
“Given the sharp decline in new orders and backlogs, it doesn’t take much imagination to expect a further weakening of the economy,” said Cyrus de la Rubia, chief economist at Hamburg Merkel Bank, which commissioned the survey.
Services activity, which had been booming in August due to the French capital hosting the Olympics, slowed sharply with the index falling to 50.5 from 52.9, marking the slowest growth rate in seven months. After a busy month in August, France’s services sector fell back into contraction.
Manufacturing activity continues to weaken across the euro zone, with little sign of a recovery in the struggling factory sector. The survey showed that manufacturing in Germany, long Europe’s industrial powerhouse, slowed further, with an activity index hitting its lowest in a year.
Earlier this month, automaker Volkswagen AG said it was considering unprecedented factory closures in Germany due to tough economic conditions and growing competition from outside Europe.Klaus Vistesen of Pantheon Macroeconomics warned in a client note that weaker production and falling jobs in Germany are raising the risk that the euro zone’s largest economy will slip into a technical recession, or a second consecutive quarter of contraction.
There were also signs of slowing growth in the world’s major economies. India posted its slowest growth rate so far this year, the country’s economic activity survey said. In the UK, economic activity lost momentum in both services and manufacturing. The United States, which has seen relatively strong growth this year, is expected to post broadly stable growth when this month’s economic activity survey is released later on Monday.
The slowdown in euro zone economic activity comes after the ECB cut its key interest rate for the second time this year in early September, and any signs of a slowdown could force rate-setters to act more decisively.
Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby
