Europe Data Points to Contraction but Economy Set to Avoid Worst-Case Scenario

The latest purchasing-manager data is consistent with economists’ evolving expectations about how Russia’s war in Ukraine and the rocketing energy prices it has caused will impact Europe’s economy next year. 

Many have raised their outlooks for Europe, with a few even expecting Germany—Europe’s largest economy and one of the worst hit by the energy-price explosion—to post growth next year. 

Positive factors include progress made by European governments in securing non-Russian supplies of natural gas, new government subsidies to help businesses and households absorb higher prices, and robust employment. Globally, signs that Beijing could give priority to higher economic growth next year are also pointing upward for global growth.

Business surveys have pointed to a significant slowdown in the global economy for many months, but that is only now showing up clearly in the hard data collected by governments. Around the world, household demand for goods is weakening, and factories are cutting production in response. That is also showing up in weaker trade, with Asia’s industrial powerhouses reporting falls in exports during November.

The latest sign that households are cutting back on their consumption of goods as prices rise faster than wages came from the U.K., where the volume of retail sales fell by 0.4% in November, to a level 0.7% lower than before the pandemic.

That follows the release of figures from the Commerce Department on Thursday that showed U.S. retail sales fell 0.6% in November for the biggest decline this year. In the eurozone, retail sales tumbled in October as the cost of heating homes jumped with the arrival of colder weather. 

“While the further fall in business activity in December signals a strong possibility of recession, the survey also hints that any downturn will be milder than thought likely a few months ago,” said Chris Williamson, S&P Global’s chief business economist. 

A survey for Japan suggested that economic activity stopped falling in December, while a decline in activity in the U.K. also eased. Economists expect surveys for the U.S. scheduled to be released later Friday will also point to a smaller decline in business activity during December than in November. 

Two big uncertainties surround the outlook for next year: how much further central banks will raise their key interest rates to tame inflation, and how China’s economy will perform as Covid controls are relaxed.  

The European Central Bank on Thursday acknowledged for the first time that the eurozone economy is likely to contract both this quarter and next. But ECB President

Christine Lagarde

said any recession would be “relatively short-lived and shallow.” 

With fears of a steeper downturn receding, central bankers have signaled that they intended to tighten monetary policy further in 2023 to ensure inflation falls back to their targets after a surprisingly strong surge this year. 

Higher interest rates will dampen a potential rebound in the global economy as 2023 advances, ensuring that many households on lower incomes will continue to experience hardship and worries over job losses.

“Policy makers, at least in the U.S. and Europe, now appear resigned to weaker economic growth in 2023,” said Christian Nolting, chief investment officer at Deutsche Bank’s private bank. “Any recessions are likely to be short-lived, but they will not be painless.”

With the global economy buffeted by so many headwinds at the same time—including the tail end of the Covid-19 pandemic and the war in Ukraine—it is possible that central banks will raise rates further than they need to, and deepen the downturn. 

China’s move away from its zero-Covid policy should boost growth in the world’s second-largest economy, although that might strengthen inflationary pressures elsewhere. 

It isn’t clear how soon that boost will come, with some economists warning that a surge in Covid infections could significantly weaken Chinese output in the early months of next year, followed by a strong rebound starting in the second quarter. 

“Fear of quarantine has now given way to fear of infection, and the economic outcome is even worse,” said Mark Williams, chief Asia economist at Capital Economics. “We now expect sharp falls in activity this quarter and next.”

Write to Paul Hannon at paul.hannon@wsj.com

The latest purchasing-manager data is consistent with economists’ evolving expectations about how Russia’s war in Ukraine and the rocketing energy prices it has caused will impact Europe’s economy next year. 

Many have raised their outlooks for Europe, with a few even expecting Germany—Europe’s largest economy and one of the worst hit by the energy-price explosion—to post growth next year. 

Positive factors include progress made by European governments in securing non-Russian supplies of natural gas, new government subsidies to help businesses and households absorb higher prices, and robust employment. Globally, signs that Beijing could give priority to higher economic growth next year are also pointing upward for global growth.

Business surveys have pointed to a significant slowdown in the global economy for many months, but that is only now showing up clearly in the hard data collected by governments. Around the world, household demand for goods is weakening, and factories are cutting production in response. That is also showing up in weaker trade, with Asia’s industrial powerhouses reporting falls in exports during November.

The latest sign that households are cutting back on their consumption of goods as prices rise faster than wages came from the U.K., where the volume of retail sales fell by 0.4% in November, to a level 0.7% lower than before the pandemic.

That follows the release of figures from the Commerce Department on Thursday that showed U.S. retail sales fell 0.6% in November for the biggest decline this year. In the eurozone, retail sales tumbled in October as the cost of heating homes jumped with the arrival of colder weather. 

“While the further fall in business activity in December signals a strong possibility of recession, the survey also hints that any downturn will be milder than thought likely a few months ago,” said Chris Williamson, S&P Global’s chief business economist. 

A survey for Japan suggested that economic activity stopped falling in December, while a decline in activity in the U.K. also eased. Economists expect surveys for the U.S. scheduled to be released later Friday will also point to a smaller decline in business activity during December than in November. 

Two big uncertainties surround the outlook for next year: how much further central banks will raise their key interest rates to tame inflation, and how China’s economy will perform as Covid controls are relaxed.  

The European Central Bank on Thursday acknowledged for the first time that the eurozone economy is likely to contract both this quarter and next. But ECB President

Christine Lagarde

said any recession would be “relatively short-lived and shallow.” 

With fears of a steeper downturn receding, central bankers have signaled that they intended to tighten monetary policy further in 2023 to ensure inflation falls back to their targets after a surprisingly strong surge this year. 

Higher interest rates will dampen a potential rebound in the global economy as 2023 advances, ensuring that many households on lower incomes will continue to experience hardship and worries over job losses.

“Policy makers, at least in the U.S. and Europe, now appear resigned to weaker economic growth in 2023,” said Christian Nolting, chief investment officer at Deutsche Bank’s private bank. “Any recessions are likely to be short-lived, but they will not be painless.”

With the global economy buffeted by so many headwinds at the same time—including the tail end of the Covid-19 pandemic and the war in Ukraine—it is possible that central banks will raise rates further than they need to, and deepen the downturn. 

China’s move away from its zero-Covid policy should boost growth in the world’s second-largest economy, although that might strengthen inflationary pressures elsewhere. 

It isn’t clear how soon that boost will come, with some economists warning that a surge in Covid infections could significantly weaken Chinese output in the early months of next year, followed by a strong rebound starting in the second quarter. 

“Fear of quarantine has now given way to fear of infection, and the economic outcome is even worse,” said Mark Williams, chief Asia economist at Capital Economics. “We now expect sharp falls in activity this quarter and next.”

Write to Paul Hannon at paul.hannon@wsj.com