Eurozone economic downturn deepens in July

July 25, 2023

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Eurozone economic downturn deepens in July

The eurozone’s downturn deepened at the start of the third quarter, according to a closely watched business survey that suggested the region’s economy is shrinking. 

The HCOB flash eurozone composite purchasing managers’ index, a measure of activity at companies across the 20-country bloc, fell to an eight-month low after a much sharper slowdown in services and manufacturing sectors across the month of July. 

The result is expected to add to calls for the European Central Bank to stop raising interest rates after this week. The euro fell 0.5% against the US dollar to $1.107, while Germany’s rate-sensitive two-year bond yield dropped 6.5 basis points to 3.03% as investors bet against further rate increases following this Thursday’s baked-in 25bp move. 

By falling to 48.9, down from 49.9 in the previous month, the PMI index dropped further below the 50 mark that differentiates contraction from expansion and in the process, raised fears of a potential recession in the eurozone economy after two quarters of a mild contraction which has been observed.

The most recent flash reading was well below the 49.7 forecast by economists in a recent Reuters poll. The services sector remained in growth territory, despite a drop in its PMI reading to a six-month low of 51.1. The observed decrease in the manufacturing sector continued further after its reading fell to a new 38-month low of 42.7. Weakening demand triggered the steepest decline in manufacturing orders since 2009, while the services sector suffered its first drop in orders for seven months. Job growth continued, albeit at the slowest pace for more than two years. 

The sign of a weakening economy came a few days before the ECB is expected to continue raising its benchmark rates to tackle the remaining levels of high inflation. Economists think this week could mark the end of the ECB’s 12-month monetary tightening cycle if the eurozone economy continues to weaken.

However, the central bank has said in recent weeks that it is concerned high wage growth and rising services prices could keep inflation above its 2 per cent target for too long.

UK economic activity slows as rising interest rates hit spending

UK economic activity slowed sharply in July as rising interest rates hit consumer spending and a manufacturing downturn deepened, a closely watched survey has shown. 

The latest data gathered from the UK PMI services output index, a measure of activity in the sector, fell to a new six-month low of 51.3, according to new data released this week. Meanwhile the manufacturing output index hit a seven-month low of 46.5, indicating that a majority of businesses were reporting a contraction, similar to reporting from the eurozone region.

This brought the composite index, which combines the two sectors, to a seven-month low of 50.7, down from 52.8 in June. 

The latest data only proved to bolster the case for the BoE to stop raising interest rates soon, and to deliver only a 0.25 percentage point increase, rather than a 0.5 percentage point rise, that looks set to be introduced next month.

Service sector companies responding to the survey said a weakening property market was hitting activity, and both businesses and consumers were cutting back on discretionary spending. 

Manufacturers said a downturn in European markets was hitting demand for new orders. They bolstered their output partly by running down backlogs of work as previous blockages in supply chains eased and it became easier to hire staff who were previously in short supply.

There was also new evidence of inflationary pressures easing. Companies answering the survey said both costs and selling prices were still rising, but at the slowest pace since early in 2021. 

However, service sector companies were still managing to pass higher wage costs on to customers, a trend that will reinforce the BoE’s fears of a tight labour market fuelling persistent inflation. 

Mexico's July inflation eases to lowest in two years

Mexico's headline inflation rate eased to 4.79% in the first half of July to its lowest level in more than two years, the national statistics agency said on Monday, but was still above the central bank's official target of 3%.

The level, which was the lowest since March 2021, was also slightly above the 4.77% predicted by economists polled by Reuters.

INEGI data showed that annual core inflation, which strips out some volatile food and energy prices, slid to 6.76% in the first two weeks of July.

Economists polled by Reuters had expected it to hit 6.73%. Services inflation was up by 0.3%, in line with the gain a year ago.

Last month, Mexico's central bank board members made the unanimous decision to keep its benchmark interest rate at 11.25% and said it might need to maintain rates at current levels for an extended period to bring inflation down to target.

Banxico first paused its rate hikes in May after a nearly two-year hiking cycle that began in June 2021.

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