San Francisco Frontiers - Hopes grow that eurozone will dodge recession

Europe has benefited from lower inflation, improved supply chains and the recent reopening of China's Covid-scarred economy, leading to increased optimism for 2023.

The outlook for the single currency area is significantly brighter than it was a few months ago, when panic set in over the impact of Russia's war in Ukraine on Europe's economy.

The S&P Global Flash Eurozone purchasing managers' index (PMI) rose to 50.2 in January from 49.3 in December. A figure higher than 50 indicates growth.

"This was the third successive increase and, as such, provides more evidence that the region has so far avoided the sharp downturn that we and many others had predicted," Andrew Kenningham, chief Europe economist at Capital Economics, said in a note.

Almost all experts warned last year that the eurozone would enter a recession -- two consecutive quarters in which the economy shrinks -- in the final three months of 2022 and the first quarter of 2023.

Those fears are receding, but Europe still faces challenges ahead.

Demand for goods and services continued to weaken, industrial orders fell in January -- although less sharply than in December -- and the impact of more interest rates hikes could still be felt.

European Central Bank chief Christine Lagarde on Monday showed no signs of moving away from more rate hikes, insisting they must continue rising at a "steady pace" in order to avoid inflation becoming entrenched.

Inflation in the single currency area remains high at 9.2 percent, but has fallen for two months in a row, boosted by the slowdown in the rate of energy price rises.

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Last week Lagarde said she expected the eurozone economy to fare "a lot better" than initially feared, with expectations of "a small contraction" instead of a recession.

"The survey undoubtedly brings welcome good news to suggest that any downturn is likely to be far less severe than previously feared and that a recession may well be avoided altogether," said Chris Williamson, S&P's chief business economist.

The economy has been helped by concerns easing over the impact of soaring energy bills, thanks to mild winter weather and generous government support on the continent.

But Williamson warned that the region was "by no means out of the woods yet".

The EU's economy commissioner Paolo Gentiloni last week said there was an expectation of "subdued growth" for the rest of 2023.

"The war in Ukraine of course continues to cloud the outlook. And while high storage levels and lower demand have helped to bring energy prices down, the crisis is certainly not over," Gentiloni added.

The European Union's statistics agency will publish growth data for 2022's fourth quarter next Tuesday.

The single currency area's largest economy, Germany, benefited from the easing of supply chain pressure which helped manufacturing, S&P said, and reported improvement with the composite PMI rising from 49.0 in December to 49.7 in January.

But output in France, where activity is driven by domestic consumers and services, fell for a third consecutive month after a sharper drop in services activity.

S&P said output for the rest of the eurozone, which comprises 20 countries after Croatia joined in January, also returned to growth.

A.Evans--SFF