Eurozone Faces Ongoing Recession Amid Sluggish Economic Activity
Economic activity in the Eurozone continued to decline in October, according to a survey of purchasing managers' indices released this week, supporting expectations for another interest rate cut by the European Central Bank (ECB) before the end of this year.
The initial estimates of the composite Purchasing Managers' Index (PMI) reached 49.7 points in October, a slight increase from the previous month's figure of 49.6, but still below the 50-mark, which is the dividing line between growth and contraction.
October’s estimates, released on Thursday, aligned with economists' expectations and suggest a slower pace of contraction in activity. The decline in the services sector, which hit an eight-month low of 51.2 in October, was exacerbated by the manufacturing sector, which remains stuck in contraction territory, despite its PMI rising to 45.9 from 45.0 in September.
This indicates that the Eurozone is stuck in a mild recession, with the economy continuing to contract slightly for the second consecutive month. The contraction in the manufacturing sector overshadowed the slight improvement in the services sector.
The ECB recently cut interest rates for the second time in a row—and the third time this year—to 3.25%, citing a slowdown in inflation and growing concerns about economic recovery. Investors and analysts expect another quarter-point cut in December and a series of additional reductions in the first half of next year.
Several ECB policymakers have warned that the weaker-than-expected economic recovery could lead to inflation targets being missed over the next 18 months. The ECB aims for a 2% inflation rate in the medium term, currently projecting to reach this level in the fourth quarter of 2025. In September, annual inflation fell to 1.7%, dropping below the ECB's threshold for the first time in more than three years.
It remains unclear whether there will be further deterioration or improvement in the near future, as new orders and business confidence fell for the fifth consecutive month.
The initial estimate of third-quarter GDP, to be published by Eurostat next Wednesday, will provide more clarity on the Eurozone's economic situation. Consensus data shows that analysts expect slight growth of 0.2% compared to the previous period, the same as in the second quarter.
On the other hand, Germany's PMI rose to 48.4 in October from 47.5, indicating that the decline in economic activity in Europe's largest economy has also slowed down.
The October PMI data suggests that German manufacturing is no longer in a free fall, and although the German government now forecasts economic contraction in 2024 for the second consecutive year, it is not yet certain that Germany is stuck in a recession.
Certainly, the weakness in this data will add more pressure on the euro against competing currencies such as the US dollar, the British pound, and commodity currencies like the Australian dollar and the New Zealand dollar.
