A closely watched survey of eurozone companies in October 2022 has added to fears of an impending recession and slump in investment, as the German economy led the fastest contraction in business activity in almost two years.
S&P Global’s flash eurozone composite purchasing managers’ index (PMI), a key barometer for the health of the manufacturing and services sectors, stood at 47.1 in October, down from 48.1 in September. A score below 50 indicates that the majority of surveyed businesses reported a contraction in activity from the previous month.
“Companies are nervous about the economic outlook, margins are under pressure and borrowing costs have risen,” said Chris Williamson, the chief business economist at S&P Global Market Intelligence, adding that this is making them “more cautious” about investment spending. He noted that the most prominent pressure on investment were currently in the chemicals, plastics and basic resources sectors.
Manufacturers have been particularly hard hit by current conditions and led the overall downturn, as factory output in October fell for the fifth consecutive month amid higher energy costs following Russia’s invasion of Ukraine. Meanwhile, the eurozone services sector experienced a contraction for the third month running.
The sharpest contraction of output in October was in the euro area’s largest economy Germany, where the PMI plummeted to 44.1, its lowest since May 2020. Excluding months with pandemic lockdowns, this was the lowest level of business activity recorded in Germany since June 2009.
“Germany is suffering from a combination of headwinds, but most forceful is the buffering from the energy shock and the cost of living crisis,” said Mr Williamson. While high energy prices were weighing on factory production in Germany, anecdotal evidence suggests there was a sustained weakening of demand for goods.
Meanwhile, France witnessed the first month in which output has not grown since March 2021, as new orders declined amid higher prices and levels of uncertainty.
New orders in both the manufacturing and services sectors across the Euro area dropped sharply in October, compared with a month earlier, forcing many companies to rely on previously placed orders to maintain activity levels. Mr Williamson told fDi that this “will not be sustainable” and will likely lead to “an even steeper downturn accompanied by falling employment and investment” in the coming months.
One bright spot in the otherwise gloomy outlook was that businesses reported that supply shortages showed further signs of easing. Mr Williamson noted that not all investment spending will be curbed, particularly as companies continue to focus on the energy transitions and sustainability.
fDi Markets data indicates that greenfield investment pledged to renewable energy projects is on track to reach its highest level on record in 2022. At the same time, higher fossil fuel prices have fomented a surge of foreign investment into oil and gas extraction.
The European Central Bank (ECB) said in September that while eurozone business investment was expected to decline in the short term, it would pick up should uncertainty subside and supply bottlenecks continue to ease.
“Investment will also be supported by the need for high capital expenditure related to the decarbonisation of the European economy, including in the context of transitioning away from dependency on Russian energy supplies,” said the ECB.
Despite prospects for investment into the energy transition, business confidence remained stubbornly low in October, sitting at the second-lowest level since the early pandemic lockdowns in 2020.