The economic outlook for Europe continued to darken early this month, according to preliminary readings on gauges of private sector business activity.
A composite PMI for the region betrayed a fourth monthly contraction in data out Monday. At 47.1, S&P Global’s gauge now sits at a 23-month low (figure below).
Outside of the pandemic, the flash print for October was the worst since April of 2013. That’s bad. And it’s likely to get worse as winter strains regional power provision and tests the mettle of war-weary politicians tasked with staving off societal unrest tied to soaring energy bills.
“The eurozone economy slipped into a steeper downturn at the start of the fourth quarter,” S&P Global said, in the color accompanying Monday’s release. “Manufacturing, and energy intensive sectors in particular, reported the steepest output loss, but services activity also continued to fall at an accelerating rate amid the ongoing cost of living crisis and broad-based economic uncertainty.”
Gauges of services and manufacturing activity both printed in contraction territory. In Germany, the composite output index dropped to just 44.1. The situation is increasingly dire for Europe’s largest economy. “We’re seeing weakness across the board,” Phil Smith, Economics Associate Director at S&P Global Market Intelligence remarked, noting that German businesses face a “growing reluctance amongst clients due to increased strain on budgets and an uncertain economic outlook, with high energy costs compounding the situation by fueling inflationary pressures and directly impacting factory production in some cases.”
In France, the situation is a little better, but still foreboding. S&P’s PMIs suggest the French economy stagnated this month for the first time since April of 2021. Firms cited elevated costs, “particularly relating to energy.” Those cost pressures are being passed along to consumers, who can ill afford to absorb them. French business confidence dropped to a two-year low from October 12 through October 20.
This all comes as the ECB readies a second consecutive 75bps rate hike on Thursday. Market pricing suggests Christine Lagarde will likely take rates above 3% midway through 2023, but I doubt it. If you assume a terminal rate of 3.25%, that’d mean hiking 375bps out of negative territory in just 12 months into the teeth of what could turn into a deep recession amid a raging ground war on NATO’s European doorstep.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, was characteristically direct. “While October’s headline flash PMI is consistent with GDP falling at a modest rate of around 0.2%, demand is falling sharply and companies are increasingly growing worried over high inventories and weaker than expected sales, especially as winter approaches,” he said. “The risks are therefore tilted towards the downturn accelerating towards the year-end.”
Europe is no longer a post-war picnic ground. Out of necessity, the EU must steel itself against the diabolical, malevolent, autocratic society of Russian nutcases. The EU must hold during the winter months. The United States must continue to back the EU and provide the Ukrainians with necessary anti-air capacity to save their infrastructure and their country. Putin and his colleagues and the general officer now in charge of the Ukraine fiasco will not abide gently. They’re accusing Ukraine of threatening to use a “dirty bomb.” I should not need to explain what that statement from Russian leadership means.