Gloomy business poll pushes euro to 20-year low against dollar


The euro hit a fresh 20-year low against the dollar on Friday after a benchmark survey of companies in the eurozone showed business activity suffered its biggest contraction for 20 months, while price pressures rose at their sharpest pace since June.

S&P Global’s flash eurozone composite purchasing managers’ index — a key gauge of business conditions — fell 0.7 points to 48.2, its lowest level since January 2021 and the third consecutive month below the crucial 50 mark that separates growth from contraction.

The reading is the strongest evidence yet that the energy crisis caused by Russia’s invasion of Ukraine has pushed the bloc into recession, along with sending inflation to record highs.

Eurozone bond and share prices plunged while the euro fell 0.9 per cent against the dollar to 97.5 cents on Friday, its lowest level since October 2002. Germany’s benchmark 10-year yield rose above 2 per cent for the first time in 11 years, while the Dax-40 share index of blue-chip German companies fell 1.4 per cent to its lowest level for almost two years.

The slowdown in activity underlines the challenge facing the region’s monetary policymakers, who are expected to continue raising borrowing costs to fight inflation in spite of the slowdown. “The stagflationary shock is real, and it is intensifying,” said Claus Vistesen, an economist at Pantheon Macroeconomics.

European Central Bank has raised rates by 125 basis points to 0.75 per cent since the start of the summer and is expected to increase borrowing costs again at its October and December meetings.

Russia’s invasion of Ukraine is squeezing natural gas supplies to Europe, causing record eurozone inflation, eroding household spending and hitting industrial production.

Deutsche Bank economists this week slashed their forecasts, saying the energy crisis had already caused the eurozone economy to start shrinking and predicting it would contract by a cumulative 3 per cent from the third quarter of this year to the second quarter of 2023.

The PMI results were as expected by economists polled by Reuters — although Germany was weaker than France — underlining the challenges confronting the eurozone economy after businesses reported falling factory output, declining new orders, soaring energy prices and plummeting expectations.

“The survey’s forward-looking indicators point to a steepening economic decline for the eurozone in the fourth quarter, adding to the likelihood of the region falling into recession,” said Chris Williamson, chief business economist at S&P Global. 

Line chart of Purchasing managers' index showing Recession looms as euro area business activity declines

The 19-country bloc has done better than expected so far this year, growing 0.8 per cent in the second quarter thanks to a recovery in tourism. However, most economists think it is already slowing sharply with many of them warning of a recession this winter. 

The PMI survey painted a gloomy picture of business conditions at the end of the third quarter, with manufacturers reporting a fourth consecutive decline in factory output and “some evidence of energy market developments also limiting production capabilities”. Job growth was unchanged from August, when it slowed to a 17-month low.

New orders for services business also fell at an increased rate as more consumers facing soaring energy and food costs stayed home to save money. Companies in all sectors reported the steepest increase in costs since June, which led to an acceleration in growth of prices charged for goods and services “as firms sought to protect margins”.

“Services growth in the eurozone is now slowing markedly as well as inflation weighs further on consumer purchasing power,” said Katharina Koenz, an economist at Oxford Economics. “And although the risk of energy shortages over the winter has reduced somewhat, it remains a key risk to the outlook.”

Supply chain constraints eased as delivery times lengthened at their slowest pace since October 2020. But Williamson said high inflation was “not only hitting demand but also limiting manufacturing production and service sector activity in some cases”. 

Some of Europe’s biggest energy users, from steel to chemical companies, are cutting back on production, and business leaders are warning that soaring prices risk eroding the region’s competitiveness.

The PMI reading for Germany fell 1 point to 45.9, its lowest level since May 2020 shortly after the pandemic hit Europe, as a sharper than expected decline in the services index added to a continued fall in manufacturing. “Germany will suffer more than most over the coming quarters as high energy costs weigh on energy-intensive industry as well as household budgets,” said Jack Allen-Reynolds, an economist at Capital Economics.

The French PMI reading rose 0.8 points to a two-month high of 51.2, confounding expectations for a decline, as activity was boosted by a rebound in services.



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