Europe’s Economy Slows as Factories Hit Hard by Surging Costs

Europe and Japan appear to be in the midst of a transition, with services still being buoyed by the gradual lifting of pandemic restrictions while manufacturing faces rising production costs and signs of weakening demand. In reaction, some global businesses have begun planning for a significant slowdown or a recession.

Data firm S&P Global said its Purchasing Managers Index for the eurozone’s services and manufacturing sectors fell to 54.9 in May from 55.8 in April. A reading above 50.0 points to an expansion in activity, while a figure below that threshold points to a contraction.

Similar surveys indicated that Australia suffered a similar fate, while Japan recorded modest pickup in total economic activity even as its manufacturing sector slowed.

The surveys of purchasing managers at businesses in some of the world’s largest and richest economies indicate that activity continues to be supported by the easing of restrictions on the services sector as Western societies learn to live with Covid-19, with sectors such as tourism experiencing a strong recovery.

At the same time, factories in Europe and Japan reported a weakening of new orders as costs and prices surge, a sign that manufacturing output will slow further over coming months.

“It remains to be seen how long this service sector rebound can persist for, especially given the rising cost of living, and the weakness of manufacturing remains a concern, as the factory malaise is already showing signs of spilling over to some parts of the services economy,” said Chris Williamson, chief business economist at S&P Global.

While the surveys point to continued growth in the second quarter, they appear to have exaggerated the strength of the global economy during the first three months of the year.

According to the Organization for Economic Cooperation and Development, economic output in its 38 members was just 0.1% higher in the three months through March than it was in the final quarter of 2021, a sharp slowdown from the 1.2% growth recorded in the three months through December.

Economists at Capital Economics say that, based on their history, the PMIs pointed to growth in rich countries of around 0.5%.

“This partly reflected volatility in imports and inventories and the effects of Covid restrictions, all of which should fade from now on allowing the PMIs to give a more accurate steer,” wrote Ariane Curtis in a note to clients.

Facing the full brunt of the jump in energy prices triggered by Russia’s attack on Ukraine, European policy makers are preparing for tough economic times ahead.

“It’s now very clear that the economic toll of this war is world-wide,” said Irish Finance Minister

Paschal Donohoe

after chairing a meeting of eurozone treasury chiefs Monday. “High prices and disruption to food supplies are rippling across the world with very serious consequences for the most vulnerable in our societies.”

According to the surveys of purchasing managers, the U.K. has suffered the sharpest blow to activity in the wake of the invasion. S&P Global said its PMI for the country slumped to 51.8 in May from 58.2 in April to hit its lowest level in 15 months. Inflation hit a four-decade high in April as home energy prices surged.

“In the U.K., we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy,” said Andrew Bailey, governor of the Bank of England, in a speech Monday. “We expect that to weigh heavily on demand.”

Citing the impact of the conflict on energy and food prices, the United Nations last week lowered its forecast for global economic growth in 2022 to 3.1% from 4%, and its forecast for U.S. economic growth to 2.6% from 3.5%.

Business leaders share those worries. A survey conducted by the Conference Board and released Tuesday found chief executive officers at 56 of Europe’s leading companies had become much more gloomy about their prospects in the six months since the last poll. The measure of confidence fell to 37 from 63, with a reading below 50.0 indicating that more CEOs are pessimistic than optimistic about the outlook.

Write to Paul Hannon at [email protected]

Europe and Japan appear to be in the midst of a transition, with services still being buoyed by the gradual lifting of pandemic restrictions while manufacturing faces rising production costs and signs of weakening demand. In reaction, some global businesses have begun planning for a significant slowdown or a recession.

Data firm S&P Global said its Purchasing Managers Index for the eurozone’s services and manufacturing sectors fell to 54.9 in May from 55.8 in April. A reading above 50.0 points to an expansion in activity, while a figure below that threshold points to a contraction.

Similar surveys indicated that Australia suffered a similar fate, while Japan recorded modest pickup in total economic activity even as its manufacturing sector slowed.

The surveys of purchasing managers at businesses in some of the world’s largest and richest economies indicate that activity continues to be supported by the easing of restrictions on the services sector as Western societies learn to live with Covid-19, with sectors such as tourism experiencing a strong recovery.

At the same time, factories in Europe and Japan reported a weakening of new orders as costs and prices surge, a sign that manufacturing output will slow further over coming months.

“It remains to be seen how long this service sector rebound can persist for, especially given the rising cost of living, and the weakness of manufacturing remains a concern, as the factory malaise is already showing signs of spilling over to some parts of the services economy,” said Chris Williamson, chief business economist at S&P Global.

While the surveys point to continued growth in the second quarter, they appear to have exaggerated the strength of the global economy during the first three months of the year.

According to the Organization for Economic Cooperation and Development, economic output in its 38 members was just 0.1% higher in the three months through March than it was in the final quarter of 2021, a sharp slowdown from the 1.2% growth recorded in the three months through December.

Economists at Capital Economics say that, based on their history, the PMIs pointed to growth in rich countries of around 0.5%.

“This partly reflected volatility in imports and inventories and the effects of Covid restrictions, all of which should fade from now on allowing the PMIs to give a more accurate steer,” wrote Ariane Curtis in a note to clients.

Facing the full brunt of the jump in energy prices triggered by Russia’s attack on Ukraine, European policy makers are preparing for tough economic times ahead.

“It’s now very clear that the economic toll of this war is world-wide,” said Irish Finance Minister

Paschal Donohoe

after chairing a meeting of eurozone treasury chiefs Monday. “High prices and disruption to food supplies are rippling across the world with very serious consequences for the most vulnerable in our societies.”

According to the surveys of purchasing managers, the U.K. has suffered the sharpest blow to activity in the wake of the invasion. S&P Global said its PMI for the country slumped to 51.8 in May from 58.2 in April to hit its lowest level in 15 months. Inflation hit a four-decade high in April as home energy prices surged.

“In the U.K., we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy,” said Andrew Bailey, governor of the Bank of England, in a speech Monday. “We expect that to weigh heavily on demand.”

Citing the impact of the conflict on energy and food prices, the United Nations last week lowered its forecast for global economic growth in 2022 to 3.1% from 4%, and its forecast for U.S. economic growth to 2.6% from 3.5%.

Business leaders share those worries. A survey conducted by the Conference Board and released Tuesday found chief executive officers at 56 of Europe’s leading companies had become much more gloomy about their prospects in the six months since the last poll. The measure of confidence fell to 37 from 63, with a reading below 50.0 indicating that more CEOs are pessimistic than optimistic about the outlook.

Write to Paul Hannon at [email protected]