Struggling Eurozone Faces Contraction While U.S. Keeps Pace — 4th Update

By Joshua Kirby

The eurozone economy slowed sharply as the third quarter draws to a close, contrasting still-dynamic growth in the U.S., according to a series of business surveys released Monday.

The eurozone surveys suggest that a soft landing from the surge in inflation that accompanied Russia's full-scale invasion of Ukraine could be in doubt.

Policymakers at the European Central Bank had hoped to tame inflation without pushing the eurozone economy into contraction, but there are growing signs that already anemic activity has weakened over recent months as borrowing costs remain high.

The euro lost ground against the dollar and sterling in response to the news, signaling that traders expect the faltering economy to push the ECB to cut rates more quickly.

Private-sector activity shrank in the currency union in September, according to S&P Global's Composite Purchasing Managers' Index, published Monday. The composite index dropped to 48.9, falling below the 50, the threshold between expansion and contraction.

"After the stagnation that followed the energy price shock, the eurozone economy is now barely experiencing any recovery," said Bert Colijn, an economist at bank ING.

In the U.S., the composite index fell only slightly as robust growth in services kept wider activity ticking along. Nevertheless, the manufacturing sector booked a sharper decline than expected, and companies' confidence for the near-term future remains clouded by political uncertainty ahead of November's presidential elections, the surveys show.

The surge in energy prices that followed Russia's invasion of its neighbor cut the eurozone's recovery from the Covid-19 pandemic short, but the currency area avoided a recession. However, the economy slowed in the three months through June as businesses cut back on investment in response to high borrowing costs.

Throughout the post-invasion stall, the eurozone's job market has remained strong, with the unemployment rate at a record low. But the surveys suggested a turning point has been reached, with businesses shedding workers at the fastest rate since the end of 2020.

Weaker demand also helped cool price pressures. Businesses in the services sector, which has been a key driver of inflation in the eurozone, reported the smallest rise in input costs in three and a half years, while those costs fell for manufacturers. As a result, the prices that businesses charged their customers rose at their slowest rate since the Russia-Ukraine conflict sparked a lengthy cost-of-living crisis early in 2022.

The surveys carried few hints of a rebound in the coming months, with new orders in decline.

"Considering the rapid decline in new orders and the order backlog, it doesn't take much imagination to foresee a further weakening of the economy," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which commissioned the surveys.

Services activity, which was fueled by the Olympic Games in the French capital in August, slowed sharply, with the index deteriorating to 50.5 from 52.9, pointing to the weakest rate of growth in seven months. France's services sector, which had a busy August, fell back into contraction.

Manufacturing activity continued to weaken across the eurozone, with little sign of a rebound for the beleaguered factory sector. Germany, long Europe's industrial powerhouse, saw a further slowdown in manufacturing, the surveys showed, with the measure of activity reaching its lowest point in a year.

Earlier this month, auto giant Volkswagen said it would consider unprecedented closures of factories in its home country in response to a bleak economic backdrop and fiercer competition from outside Europe. Weaker output and falling employment in Germany increase the risk that the eurozone's largest economy is sliding into a technical recession, or two successive quarters of contraction, warned Claus Vistesen at Pantheon Macroeconomics in a note to clients.

There were signs of fading growth elsewhere among the world's major economies, too. India recorded its slowest pace of growth so far this year, according to its own activity surveys. In the U.K., activity lost momentum both in services and manufacturing.

Sputtering activity in the eurozone comes after the ECB cut its key interest rates for the second time this year earlier in September, and signs of a slowdown could push rate setters to act more decisively.

"This report might drive a shift in the narrative of the ECB which, until now, remains cautious," said Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions. Some policymakers at the bank could start pushing more firmly for another cut next month as signs emerge that monetary policy may be too tight, Boucher wrote in a note.

Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby

(END) Dow Jones Newswires

September 23, 2024 10:59 ET (14:59 GMT)

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