A steep drop in euro zone business activity last month will likely put a damper to any hopes that the currency union will avoid a recession, just as elevated inflation puts pressure on the European Central Bank to act, a survey showed.
S&P Global's final composite Purchasing Managers Index PMI for the euro zone fell to a 20 month low of 48.1 in September from August's 48.9, below a preliminary 48.2 estimate. Anything below 50 indicates contraction.
Chris Williamson, chief business economist at S&P Global Market Intelligence said that any hopes of the euro zone avoiding the recession are further dwindling due to the steep drop in business activity signalled by the PMI.
The survey shows a worsening of the economic downturn, but the inflation picture has also deteriorated, which means policymakers are facing an increased risk of a hard landing as they try to rein in accelerating inflation. Both the composite input and output prices indexes went up sharply after reversed a downward trend. The input prices of PMI jumped to 77.1 from 72.3.
Rising prices, particularly energy costs, have kept consumers wary, and the PMI for the bloc's dominant services industry sank to 48.8 last month from 49.8, its lowest since February 2021, despite the fact that it has gone up since February 2021, as well as a gloomy economic outlook.
Soaring inflation, linked to the energy crisis and war in Ukraine, is destroying demand at the same time that business confidence is slumping to levels not seen since the region's debt crisis in 2012, excluding the pandemic lock-downs, Williamson said.
Companies and households are cutting back on discretionary spending and investment in preparation for a harsh winter. Wednesday's data came after a sister survey on Monday showed that manufacturing activity in the euro zone declined further last month due to a rising cost of living crisis, while soaring energy bills limited production. The euro PMIM decline in activity across the region, but with prices rising much faster than the ECB would like to leave the central bank walking a tightrope as it tries to curtail inflation while also supporting growth.
Last month, the European Central Bank raised its key interest rates by an unprecedented 75 basis point and promised further hikes, prioritizing the fight against inflation even as the bloc is likely to go towards a winter recession and gas rationing.
A combination of those downbeat factors resulted in a drop in optimism. The services business expectations index fell to 53.6 from 56.6 in May 2020, its lowest since the coronaviruses epidemic, cementing its grip on the world.