Economic challenges lie ahead for the Eurozone, as it is likely to slide into recession by late 2023, economists have predicted.
While the standard indicator of economic wellbeing for the EU – the HCOB final Composite Purchasing Managers’ Index (PMI) put together by S&P Global – inched up to 47.2 in September, as compared to 46.7 in August, it is still hovering below the 50-mark. What this indicates is that the Eurozone has witnessed its fourth consecutive month of economic contraction.
In the third quarter, the Eurozone’s economy shrank, with several factors contributing to this, such as decline in demand in the region, higher borrowing costs, soaring prices, and consumer spending stifled as households grapple with the cost-of-living crisis. Specifically, demand plummeted at the fastest pace in almost three years, as per S&P Global data. Eurozone output has shrunk, led by decline in manufacturing and in the services sector as well.
"The drop in retail sales in August and weakness in the final PMIs for September are consistent with our view that the Eurozone economy will fall into recession in the second half of 2023," Franziska Palmas, economist at Capital Economics, was quoted as telling media.
The EU found itself plunged into a technical recession in early summer, as it grappled with slackening economic activity and persistent inflation hurdles. As part of the aggressive monetary policy of the European Central Bank (ECB) aimed at curbing inflation, it raised its key interest rate to a record high of four percent on September 14 – its 10th such move in 14 months – yet indicated that it was likely to be its last.
“Based on its current assessment, the governing council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” Christine Lagarde, the ECB president, said, in a reference to the bank’s two percent target.
Screengrab of chart showing Euro area annual inflation and its components, %, released on August 31, 2023, by Eurostat, the statistical office of the European Union.
© Photo : Eurostat
Loss of cheap Russian natural gas in the wake of the EU's self-inflicted woes linked to sanctions against Russia over Ukraine has also contributed to the bloc's woes. Germany has been hit the hardest, suffering more than other Western European countries from their embargo on Russian oil, gas, and coal imports, and is now facing the prospect of deindustrialization.