Europe’s Economy Slows Sharply as Recession Risks Grow

It comes as Germany on Thursday triggered the second stage of its three-step plan to deal with natural-gas shortages, moving closer to possible rationing this winter, which economists fear would deal a severe blow to manufacturers in Europe’s largest economy.

Data firm S&P Global on Thursday said its composite purchasing managers index—which measures activity in both the manufacturing and services sectors—for the eurozone fell to 51.9 in June from 54.8 in May to reach a 16-month low. A reading above 50.0 points to an expansion in activity, while a figure below that threshold points to a contraction.

The survey indicated that manufacturing output declined for the first time in two years, while a services sector that had been boosted over recent months by the lifting of Covid-19 restrictions cooled sharply.

“Excluding pandemic lockdown months, June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008,” said Chris Williamson, chief business economist at S&P Global.

Mr. Williamson said that the survey readings for the three months through June point to quarter-to-quarter economic growth of 0.2%, down from the 0.6% expansion recorded in the first three months of the year.

Elements of the survey pointed to even tougher times ahead, with new orders for goods and services flatlining for the first time since the eurozone’s economy began to recover from the effects of the pandemic in March 2021. And while businesses continued to hire new workers, they did so at the slowest pace in 13 months.

At the same time, the surveys also indicated that the prices charged by businesses continued to rise sharply.

“With the price indices remaining extremely strong, the eurozone appears to have entered a period of stagflation,” said Jack Allen-Reynolds, an economist at Capital Economics, referring to a sustained period of stagnant growth paired with rising prices.

While the composite

PMI

for the U.K. was unchanged in June, that was after a sharp decline in May that left the measure at a 15-month low.

The warning signs of a sharp slowdown in Europe came a day after Federal Reserve Chairman

Jerome Powell

said the central bank’s battle against inflation could lead it to raise interest rates high enough to cause a recession.

Similar surveys of activity in the U.S. to be released later Thursday are also expected to point to an economic slowdown, although not as sharp as that experienced in Europe.

The global economy faces a series of obstacles this year, ranging from Covid-19 lockdowns in China to soaring energy and food prices, Russia’s invasion of Ukraine and a broadening drive by central banks to combat high inflation by increasing borrowing costs.

For many economists, the invasion of Ukraine has been the decisive factor, since it has sent energy costs surging and pushed food prices higher at a time when inflation had already exceeded central-bank targets.

“The Russia-Ukraine war has fundamentally transformed the global economy’s trajectory and that of Europe in particular,” economists at

Barclays

wrote in their latest quarterly report on the global outlook.

The economists Thursday cut their forecasts for global economic growth, and now see the U.S. economy growing by 2.2% this year and 1.1% in 2023, having previously projected expansions of 3.5% and 2.3% respectively.

For the eurozone, they now see the economy in recession in the final quarter of this year and the first quarter of next year, and expanding by just 0.5% in 2023, a year in which growth had previously been forecast at 2.1%.

The German government moved closer to rationing natural gas on Thursday after Russia cut deliveries to the country in an escalation of the economic war triggered by Moscow’s invasion of Ukraine.

In a further sign of the coming economic stress for Europe, the German government triggered the second of three steps in its plan to deal with gas shortages after the Kremlin-controlled energy giant Gazprom, Russia’s biggest gas exporter, throttled deliveries via the Nordstream pipeline by around 60% last week.

Germany’s gas reserves are at 58% capacity, and the government now expects a gas shortage by December if supplies don’t pick up, Economy Minister

Robert Habeck

said. The step is a prerequisite for the government to enforce some of the gas-saving measures it announced at the weekend, including substituting coal for gas in power generation and creating financial incentives for companies to consume less gas.

Rationing, which would come in the third step, would focus on industry and could severely impact companies that use gas as fuel or as a raw material for production, likely pushing Europe’s biggest economy into recession, economists and company executives have warned.

A rare upside for the eurozone is the lifting of most pandemic restrictions, which means it can look forward to its best tourist season since 2019. As in the U.S., many households built up big savings when they were unable to spend on vacations, restaurants and other consumer services during the pandemic and might be able to compensate for some of the loss of spending power caused by surging prices.

However, surveys also point to a big drop in consumer confidence since Russia’s invasion of its neighbor, which indicates households might wish to hold on to their savings.

According to a long-running measure compiled by GfK, U.K. consumer confidence hit a 40-year low in May, with Britons more pessimistic than during the global financial crisis or the Covid-19 pandemic. In the eurozone, a monthly survey by the European Commission found that confidence tumbled again in June, with its measure of sentiment just above the record low reached in April 2020.

Nevertheless, in contrast with Mr. Powell’s warning, European Central Bank President

Christine Lagarde

sounded a more upbeat note when addressing the European Parliament on Monday.

“Russia’s unjustified aggression towards Ukraine is severely affecting the euro-area economy and the outlook is still surrounded by high uncertainty,” she told lawmakers. “But the conditions are in place for the economy to continue to grow and to recover further over the medium term.”