The likelihood of a recession in the eurozone increases as private sector activity worsens.
Friday’s data showed that the S&P Global Purchasing Managers Index (PMI) contracted for a seventh month in December, falling to 47. This was against the expectations of economists who had predicted a slight increase.
Despite this weakness, policymakers at the European Central Bank were united in rejecting rumors of imminent cuts in interest rates, which have risen by 450 basis points in just over a year to tackle rising inflation.
Although consumer price growth is now falling, Bank of France President François Villeroy de Galhau and his Estonian counterpart Madis Muller have both thrown cold water on investor expectations for a rate cut in the first half of next year.
Those hopes are “a little optimistic” and “a little premature,” Muller said Friday. Villeroy called for “confidence and patience”, saying the ECB is guided by data, not a calendar.
“Indicating a date for the first cut in interest rates goes against the principle of data dependence,” noted Portuguese central bank governor Mário Centeno in Lisbon.
The comments are in line with President Christine Lagarde, who said on Thursday that monetary authorities should not let their guard down and that rate cuts were not discussed “in any way” at this week’s monetary policy meeting, where the rate deposit rate was left at a record 4%.
It also revealed a more optimistic outlook for the final quarter of the year than suggested by the PMI numbers, pointing to production growth of 0.1%.
Economists consulted by Bloomberg are not so optimistic, also predicting a first recession since the pandemic for the bloc of 20 countries in the second half of this year.
“The numbers paint a bleak picture as the eurozone economy does not show any distinct signs of recovery,” Hamburg Commercial Bank chief economist Cyrus de la Rubia said. “The probability of the eurozone entering recession from the third quarter remains remarkably high.”
This lack of dynamism is evident in the forecasts for the region’s two main economies. The Bundesbank said on Friday that Germany will expand by just 0.4% next year; A day earlier, France’s statistics office said it expects production to remain stable this quarter and grow just 0.2% in the first two quarters of 2024.