Eurozone recession fears grow as business activity declines again

Business activity in the euro zone has suffered its biggest contraction in 18 months as a result of higher prices, falling demand and rising inventories of unsold goods, according to a benchmark survey of businesses, which has added to fears of an impending recession.

S&P Global Flash Composite Purchasing Managers Index on Tuesday it fell 0.7 point to 49.2, its lowest level since February 2021 and the second month in a row below the crucial 50 mark that separates growth from contraction.

Economists polled by Reuters had expected a slightly larger drop. But the survey highlighted the challenges facing the eurozone economy after German companies reported their biggest reversal in activity in more than two years, while French companies suffered their first contraction in 18 months.

Andrew Harker, chief economics officer at S&P Global, said the data “points to a shrinking economy in the third quarter.”

It added: “Cost of living pressures mean the recovery in the services sector following the lifting of pandemic restrictions has slowed, while manufacturing remained mired in contraction in August.”

Eurozone Purchasing Managers Index

Tourism and hospitality-related services were boosted this summer by the lifting of most coronavirus restrictions in Europe, but the benefits seem to have been nullified for many businesses by a growing number of opposing factors.

Russia is squeezing Europe’s natural gas supply, causing a record eurozone inflationeroding household spending and hitting business investment while forcing the European Central Bank to raise interest rates and convincing many economists that the eurozone is headed for recession.

“Preliminary PMIs for August suggest the eurozone economy is now contracting,” Jack Allen-Reynolds, an economist at Capital Economics, wrote in a note to clients, adding that “the ECB will have to go ahead with the monetary tightening even when the economy falls. in recession”.

Euro zone government bonds sold off on Tuesday, reflecting the belief that the economic downturn will not be enough to dissuade 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 companies in both services and manufacturing fell for the second month in a row, according to S&P Global, leaving factories grappling with the largest rise in unsold product inventories in the survey’s 25-year history. .

“Particularly steep declines in output were seen in basic materials categories and in the automotive sector, but reductions were also seen in parts of the service sector, including tourism and recreation and real estate,” it said.

The survey also found evidence that inflationary pressures were easing, as input costs and sales prices rose at their slowest pace for nearly a year. Supply chain constraints also eased as delivery times increased at their slowest pace since October 2020.

The reduction in business activity was mainly due to concentrated in Germany and France, it found, while output in other eurozone countries continued to rise, “albeit only marginally.”

Germany’s PMI reading fell 0.5 point to 47.6, a slightly smaller-than-expected decline to its lowest level since June 2020, as a sharp drop in the services index offset an improvement in manufacturing.

“German GDP may not have fallen in the second quarter, but it will most certainly do so in the third quarter, and we doubt it can avoid a technical recession this year,” Melanie Debono, an economist at Pantheon Macroeconomics, said in a note to investors. customers.

The French PMI reading fell more than expected, falling 1.9 points to 49.8, as activity was hit by a sharp slowdown in the services sector.

Are we headed for a global recession? Our Economics Editor Chris Giles and US Economics Editor Colby Smith discussed this and how different countries are likely to react on our latest IG Live. Look here.

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