Europe’s fight against inflation risks recession

FRANKFURT — Europe’s fight against a historic inflation spike risks pushing the region into recession, fresh survey data signaled Friday.

Key business surveys showed economic activity contracting in the eurozone while crawling to a halt in the U.K. The catch: Far from offering support, the European Central Bank and the Bank of England may add to the pain in the near term as they fight red-hot inflation.

The flash composite Purchasing Managers’ Index (PMI) for the eurozone showed that business activity contracted in July as both output and new orders fell for the first time since early 2021 when COVID-19 lockdowns were in place. Business expectations point to more pain ahead, having fallen to lows rarely seen over the past decade.

Meanwhile, the S&P Global/CIPS flash U.K. Composite Output Index showed economic growth slowing in July, with business activity expanding at its weakest pace in 17 months. As in the eurozone, forward-looking indicators suggest worse is to come.

The S&P Global business surveys for both the U.K. and the eurozone are seen as key bellwethers for economic trends.

The release of the surveys followed on the heels of British retail sales figures, which declined for the second month running in June as surging prices kept people away from the shops. Retail sales volumes fell by 0.1 percent from May.

News of business activity contracting in the eurozone came one day after the European Central Bank tightened policy for the first time in over a decade.

“With the ECB raising interest rates at a time when the demand environment is one that would normally see policy being loosened, higher borrowing costs will inevitably add to recession risks,” said Chris Williamson, chief business economist at S&P Global Market Intelligence, which compiles the survey.

Similarly, he said there are concerns that “rising interest rates, as the Bank of England seeks to control inflation, will cause demand growth to weaken further in the coming months.” Williamson noted that hiking interest rates at a time of such weak business growth is unprecedented over the past quarter-century of the survey’s history.

One bright spot is that surveys for both the U.K. and the eurozone show a marked decline in gauges of both input costs and selling prices, which should feed through to lower consumer prices.

Economists at ING said that the data highlight central banks’ potentially limited scope for further tightening. “Today’s PMI confirms our view of a modest set of rate hikes. After yesterday’s 50 basis points, we only expect the ECB to hike a further 50 basis points in total as recessionary pressures are already cooling the economy quite significantly,” said ING’s Bert Colijn. His colleague James Smith still sees a chance of a 50-basis-point rate hike to 1.75 percent by the Bank of England next month, but not much more.

 “We think the window for further Bank of England tightening is gradually closing and we expect Bank Rate to peak around 2 percent or slightly above,” he said.



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