A ‘toxic cocktail’ of stagflation in the eurozone

The eurozone's economic outlook is "getting clearer", said Ian Campbell on Breakingviews. "It looks bleak". Inflation is at a 16-year high of 3.7%, and an index of purchasing managers this week showed that manufacturers' output prices hit a 17-month high as their input prices hit a 23-month peak.

At the same time, the survey showed that both manufacturing and services activity fell below the level dividing contraction from expansion, with the composite measure covering both sectors falling to the lowest level in five years. A separate gauge of German business confidence slid to a two-year low.

Up until now, the eurozone had seemed resilient to financial market turbulence, high energy prices and the strong euro, noted Marcus Walker in The Wall Street Journal. But now even highly competitive German exporters are struggling.

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Consumers won't help out

A key worry is that consumers are unlikely to pick up the slack as external demand slows, as Capital Economics said; optimism on German prospects in particular has been based on this prospect. Mounting angst about price rises has dented consumer confidence, which in France recently fell to a record low. In Germany, market research group GfK expects just 0.5% growth in consumption this year, compared to its previous forecast of 1%.

The "very worrying" data shows that the eurozone faces a "toxic cocktail" of stagnant activity and "elevated and still-rising inflation", said Howard Archer of Global Insight. The hawkish European Central Bank is set to lift interest rates in July, which means it will be "taking unprecedented risks with growth" according to Jacques Cailloux of RBS.

With rates rising, the currency strong and inflation high, said Campbell, the risk of a nasty slowdown is rising. By the end of the year, the eurozone may already be sliding into recession.