Europe can avoid recession. But the UK economy is in shambles


Business activity across the 20 countries using the euro expanded in January for the first time in six months, according to data published on Tuesday, providing fresh evidence that the European economy may confuse expectations and avoid a recession this year.

The preliminary reading of the eurozone’s purchasing managers’ index, which tracks activity in the manufacturing and services sectors, rose to 50.2 in January from 49.3 in December, indicating the first expansion since June. A reading above 50 represents growth.

Lower energy prices and easing supply chain pressures have helped to return to modest growth, which has helped mitigate higher input costs for producers.

The rise was accompanied by a sharp improvement in optimism about the year ahead, as the recent reopening of the Chinese economy after the lifting of Covid restrictions helped push confidence to its highest level since last May. Growing optimism in Europe that Chinese consumers will start spending again is reflected in Swiss watchmaker Swatch’s (SWGAF) forecast Tuesday of record sales for 2023.

“The stabilization of the eurozone economy at the beginning of the year adds to the evidence that the region may be breaking out of recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence, the company that publishes the survey of CEOs at private sector companies.

Williamson added, however, that a “renewed slide into deflation” should not be ruled out as borrowing costs rise on the back of interest rate hikes by the European Central Bank. But he said any recession “is likely to be much less severe than previously feared”.

Berenberg Holger Schmieding, chief economist at Berenberg Holger Schmieding, said in a research note that “the still low level of consumer confidence and the delayed impact of rate hikes from the European Central Bank still suggest a slight contraction in eurozone GDP in the near term before the recovery begins to take hold.” .

Consumer sentiment in Germany, the region’s largest economy, appeared to improve for the fourth consecutive month in February from a very low base, according to a separate survey published by GfK on Tuesday.

The picture looks far less promising in the UK, where a January PMI survey showed the sharpest drop in business activity since the national Covid lockdown two years ago, as rising interest rates and lower consumer confidence dampened activity in the dominant services sector.

The preliminary reading fell to 47.8 in January, from 49 in December, to remain in contraction for the sixth consecutive month. The survey is being conducted in the UK in partnership with the Chartered Institute of Purchasing and Supply.

“Weaker-than-expected January PMI figures underscore the risk of the UK slipping into recession,” Williamson said. “Industrial disputes, staff shortages, export losses, high cost of living and high interest rates are all factors that led to an increase in the rate of economic decline again at the beginning of the year,” he added.

The British economy lost more working days due to strikes between June and November 2022 than in any six-month period over the past 30 years, according to data published last week by Britain’s Office for National Statistics.

Williamson said on Tuesday The data reflected not only short-term hits to growth, such as the strike, but “the continuing damage to the economy from long-term structural issues such as labor shortages and Brexit-related trade problems.”

Despite a bleak start to the year, UK business expectations for the year ahead hit an eight-month high, driven by hopes of an improving global economic backdrop and easing inflation.

Separate data released by the Office for National Statistics on Tuesday showed that the British government borrowed 27.4 billion pounds ($33.7 billion) in December, the highest figure for that month since records began in 1993. This was driven by a sharp increase in household energy subsidy spending. . bills, as well as the prohibitive cost of paying interest on government debt.

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