Are the Eurozone and Great Britain threatened by recession?

Last week, Purchasing Managers’ Indexes (PMI) fell in the Eurozone, the US and the UK. In Europe and the United Kingdom in particular, the index fell below the 50-point level – a clear sign of economic contraction. “PMIs are closely watched because most experts consider them an accurate and timely indicator of overall economic activity,” said Stephen Bell, chief economist for Europe, Middle East and Africa at Columbia Threadneedle Investments. But what does the other data say, and is the risk of a recession really as great as some people expect? The chief economist warns that “economic growth is at great risk, especially in the eurozone”.

Eurozone: a cause for concern

In the Eurozone, a number of economic indicators were shockingly weak. Confidence is waning among consumers and businesses alike, even though inflation is low and employment is at record levels. Bell sees several reasons for this: “Regardless of the downward trend, energy prices are still well above levels before Russia turned off the gas tap. German companies that depend on cheap Russian gas have lost their competitiveness,” said the chief economist. Although the unemployment rate is low and continues to fall in Germany, headlines about a wave of corporate bankruptcies are spooking consumers and business alike. “If interest rates continue to rise, the mood is set for doom and gloom,” Bell sums up.

According to the chief economist, the lack of trust means that consumers are less inclined to touch the capital they saved during the Covid crisis. There are exceptions: in Spain, for example, retail trade is booming. “But that just proves the rule,” Bell says. With inflation well above the ECB’s 2% target, Bell is convinced: “Key interest rates are likely to continue to rise – and the possibility of an economic contraction in winter is becoming an increasingly realistic scenario.” Even if that happened, the unemployment rate would only increase marginally.

UK: Consumer confidence is increasing

Purchasing managers’ surveys also point to weakness in the UK, particularly in the previously resilient services sector. “However, the data proved to be generally robust,” Bell notes. In contrast to the Eurozone, consumer confidence appears to be recovering in the UK and there are signs that retail sales may pick up in the fall. However, challenges remain: “With each new week, more mortgages are renewed at higher interest rates, house prices are likely to fall further, and we also expect unemployment to increase,” admits the chief economist. But we should not forget that mortgage interest rates have fallen dramatically since their highs in early July. Low inflation also means that real incomes are gradually rising. “The Bank of England could raise key interest rates again – but then the tightening is likely to end,” Bell is convinced.

PMIs are indicators of expectations. They are closely watched, but have proven for some time to be overly pessimistic about economic growth. “However, unlike the UK, weak PMIs in Europe are supported by economic data. This is particularly true for Germany, the Netherlands and Italy, a worrying picture for the chief economist at Columbia Threadneedle Investments,” Bell stresses. But Great Britain’s economy has not emerging from the crisis yet, and there are certainly risks. “However, if I am right and inflation continues to fall, then consumer confidence will also increase – so economic growth will still be weak, but it will still be in positive territory,” Bell says confidently. The chief economist believes that a recession In the US it is less likely: “While the resumption of student loan repayments could cause a brief hiccup, the overall economic fundamentals look compelling,” Bell concludes.

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