Eurozone chances of escaping recession higher than UK

Private sector PMI figures show strength in the eurozone, but point towards recession in the UK

FILE PHOTO: The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, December 8, 2016. REUTERS / Ralph Orlowski / File Photo

The economy of the private sector in the eurozone unexpectedly returned to growth this month, according to new figures.

S&P Global’s flash Purchasing Managers’ Index rose to 50.2 in January. It is the first time since June that the Index has been above 50, which denotes an expansion of activity. Below 50 means a contraction.

The rise in optimism in the 20-country euro area is being attributed to falling inflation, a recent period of warmer weather that reduced energy demand and costs as well as improving supply chains.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said that the eurozone is "by no means out of the woods yet".

“Demand continues to fall, merely dropping at a reduced rate, and an upturn in the rate of inflation of selling prices for both goods and services will add encouragement to the hawks to push for further monetary policy tightening,” he added.

The European Central Bank (ECB) has already increased interest rates by 2.5 per cent and is set for a further 0.5 per cent rise next week.

UK risks recession

However, the small rise in optimism in the euro area is contrasted with a far bleaker picture in the UK.

In Britain, the S&P Global PMI dropped to 47.8 in January from 49.0 last month, which is at the bottom end of economists' forecasts in a Reuters poll and the lowest since January 2021.

"Weaker-than-expected PMI numbers in January underscore the risk of the UK slipping into recession," said Chris Williamson of S&P Global.

"Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year," he added.

The Bank of England is expected to raise interest rates from 3.5 per cent to 4 per cent next week and then to 4.5 per cent later in the year.

"The silver lining to S&P's survey, however, is that it strengthens the case for the MPC to stop hiking the Bank Rate soon," said Gabriella Dickens, an economist with consultancy Pantheon Macreconomics.