Euro zone economy faces growing risk of recession, survey shows

Manufacturing activity across the euro zone declined again last month as consumers feeling the pinch from a deepening cost of living crisis cut spending, a survey showed on Thursday, providing more evidence of the growing risk of recession.

The downbeat survey comes just a week before the European Central Bank is expected to raise borrowing costs again to try and tame inflation running at 9.1% - over four times its 2% target - further hitting indebted consumers.

S&P Global's final manufacturing Purchasing Managers' Index (PMI) dipped to 49.6 in August from July's 49.8, below a preliminary reading of 49.7 and further below the 50 mark separating growth from contraction.

Forward looking indicators in the survey painted a gloomy picture with new orders declining, inventories of raw materials increasing again, backlogs of work being run down and stockpiles of completed products rising at a record pace.

"Recession challenges are growing as economies continue to face drawbacks from high inflation, growing uncertainties and rising interest rates," said Thomas Rinn, global industrial lead at Accenture.

"Amid the current macroeconomic pressures and the increasing cost of living crisis, it will come as no surprise that we are expecting further loss in activity in the coming months."

Gas prices have skyrocketed following Russia's invasion of Ukraine and are likely to rise further, having a knock-on effect on costs of other goods and services.

Earlier on Thursday, Fitch Ratings said a full shut-off of Russian pipeline gas to the European Union increasingly looked a reasonable assumption and a recession in the euro zone now looked likely.

While unemployment in the bloc nudged down to 6.6% in July from 6.7% in June, according to official data earlier on Thursday and as expected in a Reuters poll, the upbeat news on the job market may not last.

"The fall in the euro zone unemployment rate in July to a record low of 6.6% is likely to be as good as it gets. The region faces a difficult winter and recession looms," said Jessica Hinds at Capital Economics.

Around 120,000 Italian service sector firms could go out of business over the next 10 months due to surging energy costs, with the loss of 370,000 jobs, business lobby Confcommercio said on Wednesday. 

Persistent worries about rising global interest rates and recessions hounded stock and bond markets on Thursday, fuelled by the possibility the ECB will raise its policy rate by a record 75 basis points next week. 

Bets on that bumper move meant the closely-watched gap between German and Italian bond yields expanded to its widest since late July.

"The key decision at the upcoming meeting will be between a 50bp or 75bp hike," Morgan Stanley said in a note to clients.

"We think it is a very close call, with good arguments on each side, but ultimately think those advocating for a larger hike will prevail as September offers the best opportunity to send a clear signal of determination."