Two of the world’s largest economies moved in opposite directions at the start of the year, with U.S. businesses reporting further declines in activity in January while the eurozone saw a modest pickup.
The divergence suggests that while the U.S. economy continues to lose momentum, Europe’s could be stabilising, at least for now. The pace of contraction in U.S. firms slowed in January, according to new business surveys released Tuesday, a possible signal that the economy could be bottoming out, thanks to slowing inflation and resilient demand.
Combined, the surveys point to a global economy that looks likely to slow this year but could avoid recession. The receding threat of energy shortages in Europe, a still-growing U.S. economy, and China’s postpandemic reopening could offset the effect of higher prices and interest rates and keep the world from a steep downturn.
In the U.S., the economy continues to expand late last year, despite the Federal Reserve’s string of interest-rate increases designed to cool the economy and bring inflation under control. Higher rates have weighed heavily on certain sectors and could be causing households to pull back.
Home sales fell almost 18% in 2022 from the previous year. Retail sales were down 1.1% in December and the labour market, while still vibrant, is starting to show cracks. Employers have shed temporary workers for five straight months. Some economists see lower temporary payrolls as a precursor to a broader decline in employment.
Yet economists estimate the U.S. economy grew at a seasonally adjusted annual rate of 2.8% in the fourth quarter of last year, down slightly from 3.2% in the third quarter. Inflation, which hit a four-decade high last year, is cooling. Consumer prices rose 6.5% in December from a year earlier, down from a 2022 peak of 9.1% in June.
The Commerce Department will release fourth-quarter gross-domestic-product data on Thursday.
Until recently most economists had seen the eurozone as likely to enter a recession this year after energy bills soared because of the Ukraine war.
But the combination of a mild winter, energy-conservation efforts, moves by governments to find new natural-gas suppliers and hundreds of billions of euros in fiscal support appear to have propped up the eurozone economy.
On Tuesday, S&P Global said its composite output index for the U.S., a closely watched survey of business activity, was 46.6 in January, a slightly slower pace of contraction from December’s index of 45. In Europe, the index rose to 50.2 from 49.3. A reading above 50 points to an expansion while a reading below that level points to a contraction.
“A steadying of the eurozone economy at the start of the year adds to evidence that the region might escape recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The U.S., on the other hand, “has started 2023 on a disappointingly soft note,” he said. “Although moderating compared to December, the rate of decline is among the steepest seen since the global financial crisis.”
Monetary policy could explain some of the divergence and could point to more trouble ahead for Europe, according to Jennifer McKeown, chief global economist at Capital Economics.
While the Federal Reserve has raised interest rates by more than 4 percentage points since March to a range of between 4.25% and 4.5%, the European Central Bank has moved at a slower pace, pushing up its policy rate by 2.5 percentage points starting in July.
Rates in Europe have further to rise while the U.S. may be nearing the end of its rate-increase cycle, she wrote in a note to clients Tuesday.
“Some of this pain has yet to come in the eurozone,” she wrote. “However, the region may avoid a recession or, if there is one, it seems likely to be milder than we had feared.”
The surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in the manufacturing and service sectors. But employment continued to rise as companies worked through their backlog of orders.
In Europe, the surveys pointed to a further easing of price pressures in January, as business costs rose at the slowest pace since April 2021. The eurozone’s annual rate of consumer-price inflation eased for the second straight month in December and further declines are expected this year.
By contrast, January’s composite output index for the U.K. fell to 47.8 from 49.0 to reach a two-year low. That was a sign that the country’s economy may lag behind other parts of Europe as businesses grapple with a shortage of workers, the impact of interest-rate rises by the Bank of England that started at the end of 2021, and the continuing drag on business investment caused by its exit from the European Union.
Elsewhere, China lifted many of its zero-tolerance pandemic controls in early December in an abrupt change of course. While that led to an increase in Covid-19 infections and deaths, it also opened the door to a sharp economic rebound in the world’s second-largest economy, which suffered its weakest expansion in four decades in 2022.
“The relaxation of China’s strict zero-Covid policy has boosted growth prospects, whilst the warmer weather in Europe has helped temper the intensity of the energy crisis,” economists at Investec wrote in a note to clients as they raised their forecast for global economic growth this year to 2.4% from 2.2%.
But China’s reopening also presents a risk to the global economy. The release of pent-up demand could drive up the price of oil and other commodities, which could put renewed pressure on global inflation. That, in turn, could force central banks to keep interest rates high, which would weigh on growth.