Europe Slides Toward Recession As ECB ‘Enjoys The View’ From Rate Mountain

The ECB “definitely did not discuss rate cuts” this week, Christine Lagarde insisted, after the bank’s final policy meeting of 2023.

That might be true, but with inflation down dramatically and activity gauges indicative of contraction, policymakers may need to start that discussion sooner than they’d ideally like to.

Less than 24 hours after Lagarde spoke to the press, preliminary reads on S&P Global’s PMIs for December painted a disheartening picture.

The composite gauge printed just 47, below estimates and the seventh consecutive month below the 50 demarcation line that separates expansion from contraction.

As the figure suggests, conditions are stifling. It’s been a sideways, sub-50 slog with no discernible inflection for months on end, and the manufacturing sector is mired in a deep downturn.

“Business activity in the euro area fell at a steeper rate in December, closing off a fourth quarter which has seen output fall at its fastest rate for 11 years barring only the early-2020 pandemic months,” the color accompanying the releases said.

At 48.1, the services gauge slipped from November and the factory gauge was unchanged at a wholly discouraging 44.2. ECB staff projections released on Thursday suggested the economy should expand in 2024, but it’s not unreasonable (at all) to suggest that Europe is in a shallow recession already and likely to remain there for the foreseeable future.

Flash readings on PMIs for Germany, also released on Friday, were grim. The services gauge moved lower to 48.4 and the country’s mighty manufacturing sector is still beset — the factory index printed 43.1. “If you are on the hunt for gifts right now, you will not strike gold in the latest PMI survey for Germany,” Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said Friday. Manufacturing new orders contracted for a 21st consecutive month, even as some firms were more optimistic about the outlook. In the German services sector, businesses are still operating against “the gloomy hues of stagflation,” as de la Rubia put it.

Things aren’t any better in France. In fact, they’re considerably worse. At 44.3, the services sector gauge printed a 37-month low. The only way to put a positive spin on that is to compare it to the flash read on the French manufacturing sector, which was a disconcerting 42. That’s a 43-month low if you’re keeping track at home. “The French economy is sinking into the recession quagmire,” Tariq Kamal Chaudhry, another economist at Hamburg Commercial Bank, remarked.

All of this should at least put additional downward pressure on inflation. Or maybe not. Although input price growth receded to a multi-month low across Europe early this month, selling prices rose at the fastest rate since May. The ECB alluded to that on Thursday, when the GC nodded to “elevated” domestic price pressures.

In a Friday interview with Ecorama radio, Bank of France boss Francois Villeroy waxed poetic about the scenery from 4%, which for the ECB counts as a towering policy rate. “In mountains there are peaks and descents and there are plateaus,” he said. “Today we are on a plateau and we need to give ourselves time to enjoy the view.”