Eurozone business activity falls to 17-month low, raising recession fears

Eurozone business activity has gone into reverse for the first time since February 2021 after companies were hit by falling orders and rising prices, fuelling economists’ expectations of a recession this year.

Fears that the 19-country single currency zone is heading for a sharp downturn were reinforced by S&P Global’s flash eurozone composite purchasing managers’ index for July, which on Friday showed output and new orders both fell for the first time since coronavirus lockdowns in early 2021.

The outlook for the eurozone has worsened in recent weeks after the European Central Bank raised interest rates more than expected on Thursday, while Russia is squeezing natural gas supplies to Europe, Italy is in the grip of a political crisis and record inflation is eroding household spending.

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

It is 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 per cent against the US dollar to $1.015. German 10-year bond yields also fell to 1.07 per cent, their lowest since May, on growing expectations that a recession will cause the ECB to stop raising rates sooner than expected.

Melanie Debono, an economist at Pantheon Macroeconomics, said: “An economic slowdown could well mean that the central bank lifts rates by less than markets expect, but further hikes are coming, all the same.”

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

“The eurozone economy looks set to contract in the third quarter as business activity slipped into decline in July and forward-looking indicators hint at worse to come in the months ahead,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Factories cut back on procurement after they experienced “the largest build-up of unsold finished goods ever recorded by the survey”, caused by lower than expected sales and weaker order books, S&P Global said. It added: “Consumer-oriented services such as tourism and recreation, media and transportation saw either stalled growth or outright declines.”

Companies took a more cautious approach to hiring staff and business expectations for the year ahead fell to their lowest level since May 2020. Input inflation pressures and supply bottlenecks eased, but companies continued to increase their prices sharply.

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

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

Consumer confidence in the bloc fell to a record low this month as households confronted soaring energy and food prices, according to the European Commission’s latest survey published on Wednesday.