Europe could dodge a recession. But the UK economy is in a mess

London
CNN
 — 

Business activity across the 20 countries that use the euro expanded in January for the first time in six months, according to data published Tuesday, providing fresh evidence that Europe’s economy could confound expectations and dodge a recession this year.

An initial reading of the eurozone’s Purchasing Managers’ Index, which tracks activity in the manufacturing and service sectors, rose to 50.2 in January from 49.3 in December, indicating the first expansion since June. A reading above 50 represents growth.

The return to modest growth was helped by falling energy prices and an easing of supply chain stress, which helped temper rising input costs for producers.

The uptick was accompanied by a sharp improvement in optimism about the year ahead, as the recent reopening of China’s economy following the lifting of Covid restrictions helped push confidence to its highest level since last May. Growing optimism in Europe that China’s consumers will start spending again was reflected in Swiss watch maker Swatch

(SWGAF)’s prediction Tuesday of record sales for 2023.

“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 company that publishes the survey of executives at private sector companies.

Williamson added, however, that a “renewed slide into contraction” should not be ruled out as borrowing costs rise off the back of interest rate hikes by the European Central Bank. But any downturn “is likely to be far less severe than previously feared,” he said.

Berenberg chief economist Holger Schmieding said in a research note that “the still-low level of consumer confidence and the lagged impact of ECB rate hikes still point to a slight contraction in eurozone GDP near-term before the recovery can start to take hold.”

Consumer sentiment in Germany, the region’s biggest economy, looks set to improve for a fourth consecutive month in February from a very low base, according to a separate survey published by GfK Tuesday.

The picture looks far less promising in the United Kingdom, however, where January’s PMI survey showed the steepest decline in business activity since the national Covid lockdown two years ago, as higher interest rates and low consumer confidence depressed activity in the dominant services sector.

The initial reading fell to 47.8 in January, from 49 in December, to remain in a state of contraction for the sixth consecutive month. The UK survey is conducted in conjunction with the Chartered Institute of Procurement & Supply.

“Weaker-than-expected PMI numbers in January underscore the risk of the UK slipping into recession,” Williamson said. “Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year,” he added.

The UK economy lost more working days to strikes between June and November 2022 than in any six-month period over the previous 30 years, according to data published last week by Britain’s Office for National Statistics.

Williamson said Tuesday’s data reflected not only short-term hits to growth, such as strike action, but “ongoing damage to the economy from longer-term structural issues such as labor shortages and trade woes linked to Brexit.”

Despite the gloomy start to the year, UK business expectations for the year ahead hit their highest level for eight months, driven by hopes of an improving global economic backdrop and cooling inflation.

Separate data published by the ONS on Tuesday showed that UK government borrowing hit £27.4 billion ($33.7 billion) in December, the highest figure for that month since records began in 1993. This was driven by a sharp increase in spending on support for household energy bills, as well as the soaring cost of paying interest on government debt.