Eurozone Business Activity Falls Amid High Inflation And Energy Uncertainty

Topline

Activity in the eurozone’s private sector economy shrunk for the second consecutive month in August—raising fears of an incoming recession—amid record high inflation and uncertainty about energy supply as the region fears a halt in the supply of natural gas from Russia.

An works along the assembly line that produces both the electric vehicle Renault Zoe and the hybrid … [+] vehicle Nissan Micra, at Flins-sur-Seine, the largest Renault production site in France.

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Key Facts

According to data published by S&P Global on Tuesday, the Eurozone’s economic output contracted once again in August, hitting an 18-month low.

France’s economic output shrank for the first time in 18 months while Germany’s private sector reported its second consecutive month of contraction.

The Eurozone’s contraction was primarily driven by those two economies as economic output in the rest of the bloc continued to grow “marginally”, the report added.

The decline in economic activity was primarily attributed to the manufacturing sector along with an inflation-induced drop in tourism and recreation.

The slump in economic activity could be a sign that the Eurozone is sliding toward a recession even as it fights to clamp down on historically high consumer prices, Bloomberg reported.

On a slightly more positive note, the S&P Global report suggested that the impact of inflation in the region’s economy may have already peaked.

Crucial Quote

“The…data for the eurozone point to an economy in contraction during the third quarter of the year…The remainder of 2022 is therefore looking to be one of struggle for firms across the eurozone,” Andrew Harker, Economics Director at S&P Global Market Intelligence, said.

Big Number

$0.993. That is the current exchange rate of the Euro which fell below parity with the U.S. dollar for the second time this year on Monday.

Key Background

The latest data reinforce concerns about the eurozone’s economy and a potential recession in the region. Last month, the area reported an annual inflation rate of 8.9%—an all time high for the bloc of 19 countries that use the euro. This has primarily been driven by the rising cost of energy since Russia’s invasion of Ukraine. Natural gas from Russia is critically important for both industrial manufacturing and electricity generation in the bloc and Moscow has continued to slowly squeeze its supply, driving up prices. Europe’s benchmark Dutch Gas futures surged more than 13% to €276.74 ($274.68) per megawatt-hour on Monday after Russia’s state-owned energy firm Gazprom announced it would once again shut off the supply of natural gas to the region for three days to carry out maintenance later this month.

What To Watch For

Last month, the European Central Bank announced a 50 basis-point rate hike—its first such hike in 11 years—as it looks to clamp down on inflation. The central bank is set to meet again in September and it has signaled that further rate hikes may be incoming, although they may be smaller. However, the downturn in economic activity may force it to reconsider.