S&P Global’s purchasing managers’ index slowed to a three-year low in October, dropping to 46.5 — clearly below the 50 mark that separates expansion and contraction. Economists expected a slight improvement to 47.4.
“In the euro zone, things are moving from bad to worse,” according to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “We wouldn’t be caught off guard to see a mild recession in the euro zone in the second half of this year, with two back-to-back quarters of negative growth.”
The euro swung to a loss against the dollar, falling as much as 0.1% to $1.0655 and snapping a three-day rising streak. Bonds held onto earlier gains, which sent the 10-year German yield as much as 8 basis points lower to 2.79%. Bund yields are trading around 20 basis points off a peak touched earlier this month.
BloombergThe currency bloc’s economy faces several headwinds, including a rate-hiking campaign by the European Central Bank and a slowdown in global activity. Rising energy prices as a result of the conflict in the Middle East risk exacerbating its difficulties.
Banks in the euro zone tightened credit standards further in the three months through September due to higher borrowing costs and the worsening economic backdrop, the ECB said Tuesday in its quarterly Bank Lending Survey.
Read More: Nowcast Points to GDP Contraction in 3Q23
Data for the third quarter due a week from now are likely to show euro-area output contracted 0.1% in the period, according to Bloomberg Economics’s Nowcast. That would be the first quarterly contraction since the pandemic, though the economy did repeatedly fail to grow.
That weakness may focus ECB officials meeting this week in Athens. After a record tightening cycle of 10 consecutive interest-rate hikes, policymakers have indicated that they’ll keep borrowing costs on hold for some time.
Traders priced in more easing by the central bank next year to support the economy, with a quarter-point cut fully seen by June. They still view a pause later this week as all but guaranteed.
October’s PMI downturn was broad-based across the euro area, S&P Global said. Indicators based on business surveys in the currency blocks’ top two economies — France and Germany — remained well below the 50 mark, and the contraction affected manufacturing as well as services in both countries.
More weakness also surfaced in the labor market – a relative bright spot until now.
Bloomberg“Service providers’ hiring came almost to a standstill,” Hamburg Commercial Bank’s de la Rubia said. “Manufacturing companies are not just continuing to cut staff, they are ramping up job-shedding plans. This led for the first time since January 2021 to an overall decrease in employment.”
A gauge for the UK showed output was still contracting in October, with businesses more pessimistic than at any point this year, prompting hiring freezes and staff cuts.
