Business sentiment in the Eurozone fell again ahead of the European Central Bank meeting as President Christine Lagarde is expected to raise interest rates again.
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European business took another hit in October, reporting the largest production loss since April 2013 excluding pandemic lockdowns.
Companies have been pressured by rising inflation, particularly due to energy costs and wage pressures.
The Eurozone Composite PMI fell to 47.1 in October, down from 48.1 in September. A reading less than 50 represents a decrease in activity.
“These numbers are spreading some downside risks to a lot of people’s expectations, particularly that of the European Central Bank,” Chris Williamson, chief business economist at S&P Global Market Intelligence, told CNBC’s “Squawk Box Europe” on Monday.
Manufacturing activity led to the losses, but services production also declined for the third month in a row.
In terms of the national breakdown, business activity in Germany came in at 44.1 versus 45.7 in the previous month. In France, activity stagnated with a reading of 50 from 51.2 in September.
“The economic situation is getting worse very quickly,” Williamson said.
Melanie Debono, chief Europe economist at Pantheon Macroeconomics, said the recent data “points to a German recession, as the energy shock increasingly hits the real economy.”
The euro It lost ground against the US dollar and the British pound during morning trades in London, trading at $0.982 and £0.868, respectively, following the latest PMI data.
Euro under pressure amid optimism Federal Reserve and the energy crisis facing the eurozone in the wake of the Russian invasion of Ukraine.
The European Central Bank is expected to raise interest rates by another 75 basis points when it meets on Thursday. This will be the third consecutive major rate increase in the eurozone, after rising 50 basis points in July and jumping 75 basis points in September.
The key rate is currently at 0.75%, but ECB watchers expect that more hikes in the coming months could push it to around 2% by the end of the year.
The question now is “whether the ECB will be able to avoid a severe recession amid the inflation shock,” said Sebastian Galle, chief macroeconomic analyst at Nordea Asset Management.
Tight policy tightening could push the eurozone into recession, especially with consumer prices hitting record levels. The annual inflation rate in the eurozone reached 9.9% in September, according to the region’s statistics office, the highest ever.
Many economists are already pricing in an economic slowdown before the end of the year. However, European Central Bank member Gabriel Makhlouf said last week that despite the risk of a recession, more price increases are still necessary, according to Reuters.