Eurozone economic downturn deepened in July, business survey indicates. An influential survey of purchasing managers in the eurozone points to sharp decline in activity in the currency bloc’s business sector. The HCOB’s flash Composite Purchasing Managers’ Index (PMI) for the region which is compiled by S&P Global dropped to an eight-month low of 48.9 in July from June’s 49.9. This reading remains below the 50 mark which separates growth from contraction and lower than average economists’ expectations of a marginal dip to 49.7. Overall, the July composite PMI fits the recent trend of weakening survey indicators and increased recession risk for the region. The survey continues to suggest moderating price pressures, but hawkish policymakers at the European Central Bank (ECB) will continue to eye the impact of wages on services.
The Fed hikes interest rates by a quarter point and hints at another increase this year. On Wednesday, the Federal Reserve (Fed) hiked its benchmark lending rate by a 25 basis points, thereby taking interest rates to their highest level in 22 years. This was the 11th rate increase since the central bank began its battle against inflation in March 2022. The Fed also raised the target range for the federal funds rate by 25 basis points to a target range of 5.25 to 5.50 percent. With the increase, the midpoint of the target range is the highest since early 2001. During the press conference following the announcement, Fed Chair Jerome Powell said he sees a path to a soft landing for the economy and rate cuts this year are unlikely. Separately, the ECB also hiked interest rates for the ninth time in a row on Thursday but raised the possibility of a pause in September as inflation pressures seem to be abating and recession clouds loom on the horizon.
Eurozone banks tighten credit standards amid dwindling loan demand. Demand for loans by eurozone firms plummeted to the lowest level on record last quarter and a further contraction is expected in the coming months. The ECB said on Tuesday that, based on survey data among big banks, lenders continue to tighten access to credit. In the second quarter of this year, banks tightened their credit standards for loans or credit lines to enterprises with a net percentage of 14 percent, which was less than the previous quarter’s 27 percent, but still above the historical average of nine percent. The central bank said that credit standards were more restricted for loans to small and medium-sized enterprises, reaching 17 percent, compared to 13 percent for loans to large firms. Investment activity in the eurozone will likely weaken further with both credit standards tightening and demand for loans weakening. This will make life easier for the ECB, as it will help soften inflation pressures.
German Ifo business climate index slides to 87.3 as recession looms. Morale among business executives in Germany worsened in July for the third consecutive month, a survey that was published on Tuesday showed. The headline German IFO Business Climate Index declined to 87.3 in July compared a reading of 88.6 in June and economists’ forecast of 88.0. At the same time, the Current Economic Assessment came in at 91.3 points, compared with June’s 93.7 and 93.0 expected. The IFO Expectations Index, that attempts to anticipate firms’ projections for the next six months, fell to 83.5 in July from the previous month’s reading of 83.8 reading. This data point surpassed market expectations of 83.0. While the markets have priced-in a rise of 25-basis point in interest rates on Thursday, deteriorating macroeconomic conditions and the increased likelihood of a recession could give room to the ECB to relax its monetary policy tightening cycle.
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