A study revealed that the euro zone economy is likely to fall this quarter and won’t soon resume growing as the dampening effect of central banks’ protracted campaign of interest rate increases becomes more apparent.

S&P Global’s HCOB Flash Euro Zone Composite Purchasing Managers’ Index (PMI), seen as a reliable indicator of overall economic health, increased from August’s 33-month low of 46.7 to 47.1 in September.

However, because the score fell below the 50 threshold that separates expansion from contraction, Hamburg Commercial Bank estimated that the bloc’s GDP will drop by 0.4% this quarter, which is far worse than the flatlining forecast in a recent Reuters poll.

“A recession is becoming increasingly clear in the euro area. Unlike in the winter half-year of 2022/23, the economic weakness is not concentrated in Germany, which has suffered particularly badly from high energy prices,” said Christoph Weil at Commerzbank.

“The increase in the ECB key interest rate by 450 basis points in the meantime is slowing down the economy in all euro countries.”

Major central banks have given notice they will maintain interest rates as high as required to fight inflation, despite the fact that the top of the unprecedented global policy tightening that has lasted for two years may have been achieved.

The effects are already abundantly evident, as seen by the Europe’s largest economy, Germany, experiencing declining economic activity that suggests a recession brought on by a persistent fall in demand for products and services.

Meanwhile, as declines in demand and new orders impacted on the second-largest economy in the euro zone, France’s main services sector contracted at an even faster rate in September, according to its PMI.

Companies in Britain, which is not a member of the EU, had to deal with a considerably rougher September than anticipated, which was characterised by rising unemployment and recession fears.

As Britain’s economy has slowed and inflation has decreased, the Bank of England, which has access to the PMI data, stopped its long-running interest rate increases on Thursday. However, Governor Andrew Bailey was keen to emphasise that the central bank did not believe its task was complete.

In contrast, Spain’s GDP increased 0.5% in the most recent quarter, indicating a quicker and more robust recovery from the COVID-19 pandemic than in many other areas.

Despite businesses hardly raising their prices, the euro zone’s overall activity fell in September. Since early 2021, the composite output price index has declined to its lowest level.

The European Central Bank’s policymakers, who last week increased their benchmark interest rate to a record high of 4% in their fight against inflation, are sure to welcome that decline.

The services PMI increased to 48.4 from 47.9 but fell below breakeven for the second time this year.

Because of rising borrowing expenses, consumers who are in debt reduced their expenditure. The new business services index dropped from 46.7 to 46.4, marking its lowest level since February 2021.

Since mid-2022, the manufacturing PMI has been below 50, and the most recent headline indicator fell from 43.5 to 43.4, contrary to forecasts in the Reuters poll for an increase to 44.0.

An output measurement indicator, which contributes to the composite PMI, remained stable even though it is still very much in contraction territory.

A significant portion of that activity was factories filling preexisting orders. Since the COVID epidemic was firmly entrenched in the world in May 2020, the backlogs of work index had decreased to their lowest level.

“At the moment, businesses are still completing old orders, which keeps output manageable. However, that indicates a less optimistic prognosis for the next months, according to Bert Colijn of ING.

(Adapted from Reuters.com)

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