Europe could avoid recession. But the UK economy is in trouble

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Business activity across the 20 countries that use the euro expanded in January for the first time in six months, according to data released on Tuesday, providing fresh evidence that the European economy may be deflating expectations. and avoid recession this year.

The first reading of the euro area Purchasing Managers’ Index, which tracks activity in the manufacturing and services sectors, rose to 50.2 in January from 49.3 in December, marking the first expansion since June. A reading above 50 represents growth.

The return to modest growth was helped by falling energy prices and easing pressure on the supply chain, which helped reduce input costs for producers.

The uptick was accompanied by a sharp improvement in optimism about the year ahead, as the recent reopening of China’s economy after the lifting of Covid restrictions helped push confidence to its highest level since May. last year Growing hope in Europe that Chinese consumers will start spending again was reflected in Swiss watchmaker Swatch’s ( SWGAF ) forecast on Tuesday of record sales for 2023.

“The stability of the eurozone economy at the start of the year adds to evidence that the region may escape the recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence, the company that publishes the survey of executives at private sector companies.

Williamson, however, said a “renewed slide into contraction” should not be ruled out as borrowing costs rise as a result of interest rate hikes by the European Central Bank. But any recession is likely to be “not much more severe than previously feared,” he said.

Berenberg’s chief economist, Holger Schmieding, said in a research note that “the still low level of consumer confidence and the weak impact of the ECB rate hike still point to a slight contraction in euro area GDP in the near term before the recovery begins. ”

Consumer sentiment in Germany, the region’s largest economy, is likely to improve for the fourth consecutive month in February from a very low base, according to a separate survey published by GfK on Tuesday.

The picture looks far more promising in the United Kingdom, however, where a January PMI survey showed the fastest decline in business activity since the national Covid lockdown two years ago, as interest rates are higher and low consumer confidence dampening activity in the strongest services sector.

The first reading fell to 47.8 in January, from 49 in December, to remain in contraction mode for the sixth consecutive month. The UK survey is carried out in association with the Chartered Institute of Procurement and Supply.

“Weaker-than-expected PMI numbers in January underline the risk of the UK entering recession,” said Williamson. “Industrial disputes, labor shortages, export losses, rising costs of living and higher interest rates all meant that the rate of economic decline accelerated at the start of the year,” he said.

The UK economy lost more working days to strikes between June and November 2022 than in any six-month period over the previous 30 years, according to data released last week by Britain’s Office for National Statistics.

Williamson said Tuesday data showed not only short-term shocks to growth, such as strike action, but “Continued damage to the economy from long-term structural issues such as labor shortages and Brexit-related trade problems.”

Despite the start to the year, UK business expectations for the coming year were at an eight-month high, driven by hopes that global economic conditions would improve and inflation cool.

Separate data released by the ONS on Tuesday showed UK government borrowing hit £27.4 billion ($33.7 billion) in December, the highest figure for that month since records began in 1993. This was driven by an increase sharp in spending on home energy support. bills, as well as the high cost of paying interest on government debt.

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