Eurozone downturn deepened in July, business survey indicates

The eurozone’s downturn deepened at the start of the third quarter, according to a closely watched business survey that suggested the region’s economy is shrinking.

The HCOB flash eurozone composite purchasing managers’ index, a measure of activity at companies across the 20-country bloc, fell to an eight-month low after a sharper than expected slowdown in services and a steeper decline in manufacturing in July.

The result is expected to add to calls for the European Central Bank to stop raising interest rates after a quarter percentage point rate rise expected on Thursday.

The euro fell 0.4 per cent against the US dollar to $1.108, while Germany’s two-year bond yield dropped 0.05 percentage points to 3.16 per cent as investors dialled back their bets on further tightening.

By falling to 48.9, down from 49.9 in the previous month, the PMI index dropped further below the 50 mark that separates contraction from expansion and raised fears of a potential recession in the eurozone economy after two quarters of mild contraction.

The UK economy is also slowing sharply, according to a separate PMI survey published on Monday that showed the index of British business activity fell to a seven-month low of 50.7, down from 52.8 in June.

The flash eurozone reading was well below the 49.7 forecast by economists in a Reuters poll. 

“The eurozone economy will likely move further into contraction territory in the months ahead, as the services sector keeps losing steam,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, adding that there was “an increased probability” of the German economy sliding into recession in the second half of this year.

The services sector remained in growth territory, despite a drop in its PMI reading to a six-month low of 51.1. The decline in the manufacturing sector deepened further after its reading fell to a 38-month low of 42.7.

Weakening demand triggered the steepest decline in manufacturing orders since 2009, while the services sector suffered its first drop in orders for seven months. Job growth continued, albeit at the slowest pace for more than two years.

Economists think this week’s expected rate rise by the ECB could mark the end of its 12-month monetary tightening cycle if the eurozone economy continues to weaken.

However, the central bank has said in recent weeks it is concerned high wage growth and rising services prices could keep inflation above its 2 per cent target for too long.

Sharply lower factory gate prices in the eurozone manufacturing sector contrasted with sustained rises in prices for services that reflected companies passing on higher labour costs to customers. However, the rate of services inflation was the lowest since October 2021.

Claus Vistesen, an economist at research group Pantheon Macroeconomics, said the PMI survey would be “grist to the doves’ mill” in the case for the ECB to pause its rate rises after this week. But he added a “nasty” increase in second-quarter wages could still push it to raise rates again in September.