Euro zone firms have recorded a further slowdown in business momentum but overall economic growth is likely to remain positive as expansion in services offsets a manufacturing recession, a European Central Bank (ECB) quarterly survey of firms showed.
The euro zone economy is barely growing as Germany, its biggest economy, could be in recession and the ECB lowered rates for the third time this year on Thursday in hopes of arresting any further decline.
The souring mood among the 95 large non-financial firms surveyed reflected growing concerns about competitiveness, uncertainty about the green transition, high costs and worries over political developments.
“This was causing businesses to scale back investment and focus on cost cutting, which also weighed on consumer confidence,” the ECB said, based on the survey which was conducted between September 16th and 26th and published on Friday.
“Overall activity tended to be below prior expectations, mainly in Germany and France, but was generally more resilient elsewhere,” the ECB added.
All this adds up to a further moderation in price growth, the firms said, possibly bolstering the case for the ECB to cut interest rates quickly.
‘Hospitality demand is there, but there is no margin anymore’
The automotive sector was among the weakest and this had a knock on effect on the broader manufacturing sector as overall demand was weak and demand for battery electric vehicles was also waning, the ECB added.
“Contacts pointed to a deteriorating global economic and political environment, including, most notably, the slowing and increasingly self-sufficient Chinese economy, which was dampening export demand and intensifying import competition,” the ECB said.
Firms said they did not expect much change to the overall subdued growth environment in the short term and their employment expectations were also muted as they focus on raising efficiency and productivity.
Meanwhile, some ECB governors at Thursday’s rate-setting meeting made the case for dropping a pledge to keep policy tight as inflation may now turn out lower than anticipated only a few weeks ago, five sources said.
Their idea did not gain traction but it suggests the debate within the ECB was increasingly shifting from battling high inflation to reviving lacklustre economic growth.
At the meeting, some policymakers suggested inflation may stabilise at the ECB’s 2 per cent target a few quarters earlier than the last three months of next year, as was predicted by the bank’s staff only last month, the sources said.
They argued for dropping a long-standing pledge to keep borrowing costs “sufficiently restrictive for as long as necessary”, the sources added.
Economists say rates are restrictive when they are high enough to slow down the economy and, with it, inflation, so the change would have signalled that more rate cuts were coming.
An ECB spokesperson declined to comment.
ECB president Christine Lagarde said during her press conference that inflation would fall to 2 per cent “in the course of next year”, rather than “over the second half of next year” as she had said after the September 12th meeting. The bank will publish new projections at its next policy meeting on December 12th.
Ms Lagarde did not provide hints about future rate cuts but four sources close to the matter told Reuters on Thursday that a fourth cut in December was likely unless economic or inflation data turns around in the coming weeks.
Yet the US elections, and the threat of fresh trade tariffs if Donald Trump is elected president, were seen as a major source of uncertainty, the sources added. – Reuters
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