Eurozone blues

The eurozone's economic outlook is getting clearer – it looks bleak. Growth is falling and inflation is rising. A recession is possible, perhaps as early as the end of this year.

Manufacturing and services output in the eurozone contracted in June, according to surveys of purchasing managers. France is in retreat, with the index falling below the mark that divides contraction from expansion. The readings for the largest eurozone economy, Germany, were relatively good, but that means the undisclosed readings for the other big economies, Spain and Italy, must be very poor. What's more, the separate Ifo index of German business expectations index dropped to its lowest for two-and-a-half years.

Inflation is driving the eurozone towards this downturn. Oil and food prices are reducing consumers' real spending power. Businesses have lost confidence. They face weaker domestic demand and are hampered in export markets by the euro's strength.

The deteriorating outlook for growth would normally make interest-rate cuts likely. But the European Central Bank is moving in the other direction. It signalled its willingness to raise rates this month, and would look foolish now if it doesn't follow through on July 3. The signalling was unnecessary, but the data released on Monday supported its inflationary fears. Firms reported that their output prices are rising at the fastest rate for seventeen months.

The ECB will scent the risk of what it terms "second round effects”: the passing through of inflation that has stemmed from commodity prices. It must be troubled by many aspects of the current economic data. Though the strong euro has mitigated some of the rise in dollar-based commodity prices, inflation is almost twice the level it targets. That is not supposed to happen when growth is heading steeply down.

The combination of rising rates, an expensive currency and unpleasantly high inflation points to a recession. It will take a significant change in the trends to keep a recession away.