Eurozone business activity falls to lowest level in 17 months, raising fears of recession

Eurozone business activity falls to lowest level in 17 months, raising fears of recession

Eurozone business activity reversed for the first time since February 2021 after businesses were hit by falling orders and rising prices, fueling economists’ expectations of a recession this year.

Fears that the 19-nation single-currency zone could be heading for a steep decline were bolstered by S&P Global’s Flash Eurozone Purchasing Managers Composite Index for July, which showed on Friday that production and new orders both fell for the first time since the coronavirus shutdowns in early 2021.

The outlook for the euro zone has improved in recent weeks after the European Central Bank raised interest rates more than expected on Thursday, as Russia cuts natural gas supplies to Europe, Italy is in the throes of a political crisis and record inflation is eroding household spending.

The composite PMI, which measures the activity of services and manufacturing companies in the eurozone, fell to a 17-month low of 49.4, from 52 in June. Economists polled by Reuters had expected a reading of 51.

It’s the first time the index has fallen below the crucial 50 mark that separates growth from contraction since February 2021, when businesses were still grappling with Covid-19 restrictions.

The euro slipped on the report, down 0.7% against the US dollar at $1.015. German 10-year bond yields also fell to 1.07%, their lowest since May, on rising expectations that a recession will force the ECB to stop raising rates sooner than expected. Italy’s 10-year bond yield also fell, but the spread with Germany widened to 2.3 percentage points, close to last month’s three-year high.

Melanie Debono, economist at Pantheon Macroeconomics, said: “An economic slowdown may well mean that the central bank raises rates less than expected by the markets, but further hikes are still to come.”

The PMI score for the eurozone manufacturing sector fell more than expected to 49.6, while the reading for the broader services sector indicated that it managed to hold on to slight growth with a reading of 50.6.

“The eurozone economy appears poised to contract in the third quarter as business activity fell in July and forward-looking indicators point to worsening in the months ahead,” said economist Chris Williamson. Chief at S&P Global Market Intelligence.

Factors reduced purchases after experiencing “the largest accumulation of unsold finished goods ever recorded by the survey,” caused by weaker-than-expected sales and weaker order books, S&P Global said. He added: “Consumer-focused services such as tourism and leisure, media and transport have seen either stalled growth or an outright decline.”

Companies took a more ambitious approach to hiring staff and activity for the year ahead, which fell to its lowest level since May 2020. Pressures on input inflation and supply bottlenecks The supply squeeze eased, but companies continued to raise prices sharply.

The ECB released its survey of professional forecasters on Friday, showing that they had lowered their expectations for eurozone growth and raised them for inflation. The 56 respondents predicted gross domestic product growth of 1.5% next year, down from a forecast of 2.3% in April. Their forecast of 2.8% growth for this year was down 0.1 percentage points from their previous forecast.

They expected inflation to peak at 7.3% this year and remain above the ECB’s 2% target for the next two years, while raising their long-term forecast for price growth from 2.1 to 2.2%. Analysts said that likely contributed to the ECB’s 50 basis point rise.

Consumer confidence in the bloc has fallen to a record low this month as households grapple with soaring energy and food prices, according to the latest European Commission survey released on Wednesday.

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