Eurozone business activity suffered its biggest contraction in 18 months due to inflation, according to a benchmark survey of companies.
The S&P Global Flash Composite Purchasing Managers’ Index fell 0.7 points to 49.2 on Tuesday, the lowest level since February 2021 and the second straight month below the 50 mark that separates growth from decline.
Economists polled by Reuters had expected a slightly bigger decline. But the survey highlighted the challenges facing the eurozone economy after German businesses reported their strongest activity in more than two years, while French businesses suffered their first contraction in 18 months.
Andrew Harker, director of economics at S&P Global, said the data “represents the economy in the third quarter.” He added, “Cost of living pressures meant that the recovery in the services sector fell after the lifting of pandemic restrictions, but it fell in manufacturing in August.”
Tourism and hospitality-related services have been boosted this summer by the lifting of most coronavirus restrictions in Europe, but the benefits appear to have been canceled out for many companies by a growing number of precautionary measures.
Russia is bringing natural gas supplies to Europe, creating record eurozone inflation, eroding household spending and hitting business investment, prompting the European Central Bank to raise interest rates and convincing many economists that the eurozone is headed for collapse.
“August’s flash PMIs suggest that the Eurozone economy is now strengthening,” Jack Allen Reynolds, an economist at Capital Economics, said in a note to clients. to fall”
Euro zone government bonds sold off on Tuesday, reflecting confidence that an economic slowdown would prevent the ECB from raising its deposit rate from zero to 0.5 percent at next month’s meeting. Italy’s 10-year bond yield rose to 3.65 percent, a two-month high.
New orders for Eurozone businesses in both services and manufacturing fell for a second consecutive month, according to S&P Global, as factories grapple with the largest inventory of unsold products in the survey’s 25-year history.
“In particular, there was a sharp drop in output in basic materials categories and the autos sector, but declines were recorded in parts of the service sector, including tourism and leisure and real estate,” he said.
The survey found that inflation is slowing as input prices and selling prices both increased at the slowest pace for almost a year. As of October 2020, supply chain constraints are also being eased as delivery times increase at a slower pace.
The decline in trade activity is mostly concentrated in Germany and France, while production in other Eurozone countries continues to increase “albeit slightly”.
The PMI reading for Germany fell 0.5 points to 47.6, a slightly smaller decline than the lowest level since June 2020, as a sharp decline in the services index showed an improvement in manufacturing.
“German GDP may not fall in the second quarter, but it will certainly do so in the third quarter, and we doubt that it will be able to avoid a technical recession this year,” said Pantheon Macroeconomics economist Melanie Debono. In a note to customers.
France’s PMI reading fell more than expected, down 1.9 points to 49.8, as activity slowed sharply in the services sector.