Business activity in the 20 countries that use the euro increased in January for the first time in six months, according to data released Tuesday, providing new evidence that the European economy could confound expectations and avoid a recession this year.
A first reading of the eurozone’s Purchasing Managers’ Index, which tracks manufacturing and services activity, rose from 49.3 in December to 50.2 in January, marking the first increase since June. A reading above 50 represents growth.
The return to modest growth was aided by falling energy prices and a reduction in supply chain stress, which tempered rising input costs for producers.
The upswing was accompanied by a sharp improvement in optimism about the year ahead, as the recent reopening of China’s economy following the lifting of Covid restrictions helped drive confidence to the highest level since last May. Growing optimism in Europe that Chinese consumers will start spending again was reflected in Swiss watchmaker Swatch’s (SWGAF) forecast Tuesday of record sales for 2023.
“A stabilization in the Eurozone economy early in the year adds to evidence that the region could escape recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence, the firm that publishes a survey of executives in private sector companies.
However, Williamson added that a “renewed decline in contraction” should not be ruled out as borrowing costs rise due to interest rate hikes by the European Central Bank. But any downturn “is likely to be much less severe than previously feared,” he said.
Berenberg chief economist Holger Schmieding said in a research note that “the still low level of consumer confidence and the delayed impact of the ECB’s interest rate hikes still point to a slight contraction in eurozone GDP in the near term before recovery can begin. ”
Consumer confidence in Germany, the region’s largest economy, appears to be improving for a fourth straight month in February from very low levels, according to a separate study published by GfK on Tuesday.
However, the picture looks much less promising in the UK, where the January PMI survey showed the sharpest drop in business activity since the national Covid lockdown two years ago, as higher interest rates and low consumer confidence slow down activity in the UK. dominant service sector.
The initial reading fell to 47.8 in January from 49 in December, to remain in a state of contraction for the sixth consecutive month. The UK research is being conducted in collaboration with the Chartered Institute of Procurement & Supply.
“Weaker-than-expected PMI numbers in January underscore the risk of the UK sliding into recession,” Williamson said. “Industrial disputes, labor shortages, export losses, the rising cost of living and higher interest rates all caused the economic decline to gain momentum again at the beginning of the year,” he added.
The UK economy lost more working days to strikes between June and November 2022 than in any six-month period in the past 30 years, according to data released last week by the UK’s Office for National Statistics.
Williamson said Tuesday data not only reflected short-term hits to growth, such as strike action, but also “ongoing damage to the economy from longer-term structural problems, such as labor shortages and Brexit-related trade problems.”
Despite the gloomy start to the year, UK business expectations for the coming year reached their highest level in eight months, driven by hopes of improving global economic conditions and cooling inflation.
Separate data published by the ONS on Tuesday showed that the UK government borrowed £27.4bn ($33.7bn) in December, the highest figure for that month since records began in 1993. caused by a surge in spending to support household energy bills, as well as the skyrocketing cost of paying interest on government debt.