Easing euro zone downturn offers hope of milder recession

© Reuters. FILE PHOTO: A view shows the financial and business district of La Defense in Puteaux near Paris, France, February 7, 2022. REUTERS/Gonzalo Fuentes

By Jonathan Cable

LONDON (Reuters) -The downturn in euro zone business activity eased slightly in November offering a glimmer of hope the expected recession may be shallower than feared, but consumers still cut spending amid a cost of living crisis, a survey showed on Wednesday.

There has been mounting evidence the bloc is entering a recession and in a Reuters poll published on Tuesday economists gave a 78% chance of one within a year, with GDP expected to fall 0.4% this quarter and next.

S&P Global (NYSE:SPGI)'s flash Composite Purchasing Managers' Index (PMI), seen as a good gauge of overall economic health, nudged up to 47.8 from 47.3 in October, confounding expectations for a fall to 47.0 in a Reuters poll.

However, November is the fifth month the index has been below the 50 mark separating growth from contraction.

"Today's PMI data continue to show that the euro zone has entered a recession, with the surveys pointing to a milder contraction compared to previous recessions," said Paolo Grignani at Oxford Economics.

The downturn in German economic activity also eased in November, a sister survey showed, offering some hope an expected recession in Europe's largest economy could be milder than first feared.

However, in France activity contracted for the first time since February 2021 as lower new orders weighed on the euro zone's second-biggest economy.

In Britain, outside the European Union, economic activity fell at close to its fastest pace in nearly two years in November, adding to signs of recession there.

Another Reuters poll gave a 90% chance of a British recession within a year but that the Bank of England would press on with interest rate rises to battle inflation running at more than five times its 2% target.

STRUGGLE FOR SERVICES

Activity in the bloc's dominant services industry declined again, with the headline index matching October's 20-month low of 48.6. The Reuters poll had predicted a fall to 48.0.

Despite the ongoing slowdown firms did increase headcount, albeit at the weakest pace since March 2021. The services employment index fell to 51.7 from 52.5.

Manufacturing activity, particularly hard hit by soaring energy prices and disrupted supply chains, also declined but at a slower pace. The main index rose to 47.3 from 46.4, above the Reuters poll estimate for 46.0.

An index measuring output, which feeds into the composite PMI, jumped to 45.7 from 43.8, however some of that came from completing backlogs of work.

New orders fell sharply again and although there was a marked drop in price pressures they remained high. The output prices index fell to 63.7 from 66.1, its lowest reading since March 2021.

"The input and output price indices declined, consistent with other evidence that headline inflation is close to peaking," said Jack Allen-Reynolds at Capital Economics.

"But they are both still extremely high with services firms in particular reporting that rising wages were putting upward pressure on costs."

Inflation in the region reached 10.6% last month, more than five times the ECB's 2% target, and the central bank is expected to add another 50 basis points to its deposit rate next month so any sign of an easing in price pressures will be welcomed by policymakers.