Inflation to drive Europe to recession

S&P Global’s final composite Purchasing Managers’ Index (PMI), an indicator of economic health, dropped to an 18-month low of 48.9 in August from July’s 49.9, indicating that Europe is entering recession quite earlier than anticipated. The services sector in European economies like Germany, France and Spain has seen contraction recently, as domestic demand came under pressure from high inflation. In August the overall business activity in Britain contracted for the first time since February 2021. However, Italian services industry has returned to a modest growth.

Peter Schaffrik of the Royal Bank of Canada said “The PMI surveys signal that the euro area is entering recession earlier than we previously thought, led by its largest economy Germany, and we now see the euro area ‘enjoying’ a longer, three quarter recession”. Another survey showed that the prospect of recession has struck investor morale in the European currency union, as it plunged in September to its lowest since May 2020.

Inflationary pressures in the region remained high. So, the European Central Bank is under pressure as inflation reached a record 9.1% last month. It also faces the possibility of raising interest rates aggressively just as the economy enters a downturn.