Eurozone economy nears recession as services sector decline persists

Monitoring Desk

BRUSSELS: The Eurozone’s economic contraction persisted at the close of 2023, driven by an ongoing decline in the dominant services industry, as revealed by a survey on Thursday.

The data indicated that the bloc’s economy was officially in recession.

HCOB’s Composite Purchasing Managers’ Index (PMI), a reliable measure of overall economic health compiled by S&P Global, was revised upward for December to match November’s 47.6, following a preliminary estimate of 47.0. However, it remained below the crucial 50-mark, signifying contraction for the seventh consecutive month.

This suggests that the 20-country currency union, which had contracted by 0.1% in the third quarter of 2023, likely experienced another contraction in the last quarter, meeting the technical definition of a recession.

The services PMI saw a slight improvement, reaching a five-month high of 48.8 compared to November’s 48.7.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented, “It’s not quite recession territory yet for services, but the vibe is far from growth-oriented. There is a lack of clear signals indicating an imminent return to robust expansion.” He added that the Composite PMI sounded the recession alarm for the Eurozone.

While the downturn in demand for services showed a slight easing last month, with the new business index rising to a five-month high of 47.1 from 46.7, it remained below 50 for the sixth consecutive month. This aligns with a related survey on Tuesday, indicating that Eurozone factory activity contracted for an 18th straight month in December.

Despite signs of a continued slowdown in demand, composite output prices increased at their fastest pace since June, indicating that inflation is likely to remain above the European Central Bank’s target of 2 per cent in the near term.

“In the face of a stagnant services sector, it’s impressive that service providers are successfully transferring a portion of their growing input costs to customers,” noted de la Rubia, adding that this may go against ECB members inclined to cut rates in March, with an expectation of a first rate cut in June.

However, there is a more optimistic outlook for the future, as the composite future output index rose to a seven-month high of 57.6 from 56.0.