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Business Activity Growth Slows in Europe as Economy Suffers from High Interest Rates

There is a recorded plunge in business activity as Europe reels from rising inflation and a consistent increase in interest rates.

Business activity in Europe is waning as the region suffers slow economic growth. Recent data shows that the euro zone’s flash composite Purchasing Managers’ Index (PMI) fell from 52.8 in May, to 50.3 in June. Although analysts had predicted 52.5, any score above 50 represents growth, while scores less than 50 points to shrinkage.

In a conversation with CNBC’s Street Signs Europe, S&P Global Market Intelligence’s chief business economist, Chris Williamson, blamed several “worrying” factors. Williamson says a continuous increase in the cost of living, along with rising interest rates, are all causing the slowdown in growth.

The S&P Global said in a recent release that the current situation points to economic weakness despite a short period of growth recently recorded. The release also highlights the same factors Williamson blames for the slowdown in Europe’s economic and business activity.

“Although energy and supply chain worries have eased since late last year, June has seen a further escalation of concerns over demand growth, and in particular the impact of higher interest rates, and the resulting possibilities of recessions both in domestic markets and further afield,” wrote he.

The flash composite PMI in Germany reflected the general region’s slowdown in growth. The PMI fell from 53.9 in May to 50.8, lower than expected by economists and analysts. In a note to clients, Pantheon Macroeconomics chief eurozone economist Claus Vistesen said Germany’s GDP (gross domestic product) will be “subdued” in Q2 and Q3.

GDP is a metric that measures the total output of a country’s finished products and services in a specific timeframe.

In Q4 2022, Germany’s economy fell by 0.5%, preceding a technical recession in Q1 of 2023 when it plunged by another 0.3%.

Business Activity May Plunge Further as BoE Raises Interest Rates Again

The Bank of England (BoE) has been consistently hiking interest rates to fight inflation. While rising interest rates may tackle inflation, it forces higher expenditure for most companies and households. Recently, the BoE has increased interest rates for the 13th consecutive time, with a 50-basis-point hike. The Monetary Policy Committee voted 7-2 to support the increase, pushing base rates to 5%.

Already, the PMI in France fell from the 51.2 recorded in May, to 47.3 in June.

Consumer prices in May climbed by an annual 8.7% in the UK. This is higher than the 8.4% expected by economists polled by Reuters. According to the Office for National Statistics (ONS), core inflation – excluding food, energy, alcohol, and tobacco – climbed an annual 7.1%. The figure is an increase from the 6.8% recorded in April. Interestingly, April’s figure was the highest recorded since March 1992.

In April, UK’s inflation dropped below 10% for the first time since August 2022. Regardless, finance minister Jeremy Hunt said although the drop was welcome, “this battle is far from over”. However, in a Wednesday statement, Hunt said his ministry understands the effects of inflation on businesses and families. The minister added that it will provide support for struggling families, while it also supports the BoE’s efforts to fight inflation.

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Tolu Ajiboye

Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge.
When he’s not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.

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