By Indradip Ghosh
BENGALURU (Reuters) – Euro zone business activity shrank at the slowest pace in four months in December, suggesting a likely recession ahead will be shallower than previously thought, a survey showed on Friday, while prices rose at the most modest rate in about a year.
S&P Global’s flash Composite Purchasing Managers’ Index (PMI), seen as a good gauge of overall economic health, rose to a four-month high of 48.8 this month from 47.8 in November, higher than the median Reuters poll forecast of 48.0.
But December was the sixth month below the 50 mark separating growth from contraction, the longest streak of a downturn since June 2013.
“While the further fall in business activity in December signals a strong possibility of recession, the survey also hints that any downturn will be milder than thought likely a few months ago,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Despite the rising risks of an economic downturn, the European Central Bank hiked its key deposit rate to 2% from 1.5% on Thursday and hinted more would come as inflation is still far above its target rate of 2%.
Higher interest rates coupled with cost-of-living concerns mean demand is likely to weaken further, a view shared by a Reuters poll that showed the economy would contract this quarter and next, meeting the technical definition of recession.
Nevertheless, new orders in the private sector fell at a slower pace and soaring price growth – driven by higher energy costs in the wake of Russia’s war in Ukraine – waned further. While input prices rose at their slowest rate since May 2021, the PMI subindex tracking output prices was at its lowest in a year.
Indeed, optimism about future output increased to a four-month high. But declining demand forced firms to reduce headcount at the second-weakest rate since February 2021.
“The downside is that this improving inflation outlook is primarily a symptom of falling demand … there remain few signs of any meaningful return to growth evident as 2022 comes to an end,” Williamson said.
Activity in the bloc’s dominant services industry declined again, but the headline index increased to 49.1 – the highest since August. The Reuters poll had predicted no change from last month’s reading of 48.5.
The main index tracking manufacturing activity rose to 47.8, compared to the Reuters poll estimate and November’s 47.1. That was driven by “improving supply conditions and reduced fears of energy constraints,” Williamson added.
While prices increased at their weakest rates in about two years, an index measuring output, which feeds into the composite PMI, jumped to a six-month high of 47.9.
(Reporting by Indradip Ghosh; Editing by Hugh Lawson)
