Europe’s Economy Contracts as Tough Winter Looms

Consumption of natural gas in Europe usually rises sharply with the onset of cooler weather, and authorities have warned that without substantial cuts in gas consumption this year, they may be forced to ration the fuel. Even in the absence of rationing, any rebound in energy prices coinciding with the seasonal rise in demand could further weaken the continent’s economy.

S&P Global’s composite purchasing managers index for the eurozone economy—which measures activity in both the manufacturing and services sectors—was 47.1 in October, down from 48.1 in September. That marked the fourth consecutive month in which the measure was below the 50 threshold that distinguishes a contraction from an expansion, and was the lowest reading since November 2020.

“Demand is falling sharply and companies are increasingly growing worried over high inventories and weaker than expected sales, especially as winter approaches,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “The risks are therefore tilted toward the downturn accelerating toward the year-end.”

Across the eurozone, manufacturing suffered the largest declines in activity, particularly in energy-intensive sectors such as chemicals and plastics.

Germany—Europe’s main manufacturing hub and one of its biggest users of Russian gas before the war—suffered a sharp fall in activity. Its composite

PMI

fell to its lowest level since May 2020, when large parts of its economy were locked down in response to Covid-19. France, which is much less reliant on Russian energy supplies, recorded a stagnation in activity, having last month seen growth.

A mild start to the winter heating season and high storage levels have boosted hopes that Europe can make it through the winter without rationing, and has pushed natural-gas prices down below 130 euros a megawatt-hour, from a peak of close to 350 euros in late August.

However, the International Monetary Fund warned Sunday that Europe could yet face the outcome its governments are desperate to avoid.

“A key near-term risk is further disruption to energy supplies, which, combined with a cold winter, could lead to gas shortages, rationing, and deeper economic pain,” the fund said.

The eurozone economy has been hit hard by the fallout from Russia’s February invasion of Ukraine, as higher energy and food prices have weakened household spending power and threatened business profit margins. The largest military conflict on the continent in almost eight decades—and one of the longest—also has hit household and business confidence.

Activity in the first half of the year was boosted by the reopening of parts of the economy that had been fully or partly closed during much of 2021 under measures designed to contain Covid-19, even as the U.S. economy contracted. But the surveys of purchasing managers suggest the eurozone economy slowed sharply in the third quarter, and may even have contracted.

The IMF has lowered its economic growth forecast for the eurozone in 2023 to just 0.5%, from the 2.5% it projected in January, before the invasion. It has also lowered its forecasts for other European economies.

“Next year, Europe’s output and income will be nearly half a trillion euros lower as compared with the IMF’s prewar forecasts, a stark illustration of the continent’s severe economic losses from the war,” said Alfred Kammer, head of the IMF’s Europe department.

The business surveys are the latest sign that the global economy is slowing under the weight of rising interest rates and high energy prices. A similar survey for Australia also released Monday pointed to the first monthly contraction since January.

The pandemic continues to influence the global economy, with the survey of purchasing managers for Japan pointing to a pickup in growth as the country allowed regular tourism after a 2½-year ban. Official figures from China also released Monday showed the world’s second-largest economy expanded more strongly than expected in the third quarter as the country bounced back modestly from lockdowns in the spring.

While pointing to contraction in Europe, the surveys also indicate that inflationary pressures remain strong, with businesses continuing to report large increases in their costs, and in the prices they charge their customers. In the eurozone, the European Central Bank is expected to respond to high inflation by raising its key interest rate to 1.50% from 0.75% when it meets Thursday.

Businesses have already responded to the weaker outlook by making fewer overseas investments. The United Nations Conference on Trade and Development said Thursday that investments requiring the construction of new facilities were 10% lower in the first nine months of the year than in 2021.

James Zhan,

director of UNCTAD’s investment division, said the decline reflects higher borrowing costs and greater uncertainty that partly spring from Russia’s invasion of Ukraine.

“The outlook on global cross-border investment has turned from a strong recovery to a downward trajectory,” Mr. Zhan said. “The gloomy prospect is likely to continue into 2023.”

Write to Paul Hannon at [email protected]

Consumption of natural gas in Europe usually rises sharply with the onset of cooler weather, and authorities have warned that without substantial cuts in gas consumption this year, they may be forced to ration the fuel. Even in the absence of rationing, any rebound in energy prices coinciding with the seasonal rise in demand could further weaken the continent’s economy.

S&P Global’s composite purchasing managers index for the eurozone economy—which measures activity in both the manufacturing and services sectors—was 47.1 in October, down from 48.1 in September. That marked the fourth consecutive month in which the measure was below the 50 threshold that distinguishes a contraction from an expansion, and was the lowest reading since November 2020.

“Demand is falling sharply and companies are increasingly growing worried over high inventories and weaker than expected sales, especially as winter approaches,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “The risks are therefore tilted toward the downturn accelerating toward the year-end.”

Across the eurozone, manufacturing suffered the largest declines in activity, particularly in energy-intensive sectors such as chemicals and plastics.

Germany—Europe’s main manufacturing hub and one of its biggest users of Russian gas before the war—suffered a sharp fall in activity. Its composite

PMI

fell to its lowest level since May 2020, when large parts of its economy were locked down in response to Covid-19. France, which is much less reliant on Russian energy supplies, recorded a stagnation in activity, having last month seen growth.

A mild start to the winter heating season and high storage levels have boosted hopes that Europe can make it through the winter without rationing, and has pushed natural-gas prices down below 130 euros a megawatt-hour, from a peak of close to 350 euros in late August.

However, the International Monetary Fund warned Sunday that Europe could yet face the outcome its governments are desperate to avoid.

“A key near-term risk is further disruption to energy supplies, which, combined with a cold winter, could lead to gas shortages, rationing, and deeper economic pain,” the fund said.

The eurozone economy has been hit hard by the fallout from Russia’s February invasion of Ukraine, as higher energy and food prices have weakened household spending power and threatened business profit margins. The largest military conflict on the continent in almost eight decades—and one of the longest—also has hit household and business confidence.

Activity in the first half of the year was boosted by the reopening of parts of the economy that had been fully or partly closed during much of 2021 under measures designed to contain Covid-19, even as the U.S. economy contracted. But the surveys of purchasing managers suggest the eurozone economy slowed sharply in the third quarter, and may even have contracted.

The IMF has lowered its economic growth forecast for the eurozone in 2023 to just 0.5%, from the 2.5% it projected in January, before the invasion. It has also lowered its forecasts for other European economies.

“Next year, Europe’s output and income will be nearly half a trillion euros lower as compared with the IMF’s prewar forecasts, a stark illustration of the continent’s severe economic losses from the war,” said Alfred Kammer, head of the IMF’s Europe department.

The business surveys are the latest sign that the global economy is slowing under the weight of rising interest rates and high energy prices. A similar survey for Australia also released Monday pointed to the first monthly contraction since January.

The pandemic continues to influence the global economy, with the survey of purchasing managers for Japan pointing to a pickup in growth as the country allowed regular tourism after a 2½-year ban. Official figures from China also released Monday showed the world’s second-largest economy expanded more strongly than expected in the third quarter as the country bounced back modestly from lockdowns in the spring.

While pointing to contraction in Europe, the surveys also indicate that inflationary pressures remain strong, with businesses continuing to report large increases in their costs, and in the prices they charge their customers. In the eurozone, the European Central Bank is expected to respond to high inflation by raising its key interest rate to 1.50% from 0.75% when it meets Thursday.

Businesses have already responded to the weaker outlook by making fewer overseas investments. The United Nations Conference on Trade and Development said Thursday that investments requiring the construction of new facilities were 10% lower in the first nine months of the year than in 2021.

James Zhan,

director of UNCTAD’s investment division, said the decline reflects higher borrowing costs and greater uncertainty that partly spring from Russia’s invasion of Ukraine.

“The outlook on global cross-border investment has turned from a strong recovery to a downward trajectory,” Mr. Zhan said. “The gloomy prospect is likely to continue into 2023.”

Write to Paul Hannon at [email protected]