Business activity in the euro zone shrank significantly more than anticipated in July as demand fell in the major services sector of the union and factory output decreased at the highest rate since the beginning of COVID-19, according to a survey.
The euro zone's two largest economies, Germany and France, both had broad-based declines and are now in contractionary territory, adding to concerns that the region may enter a new recession.
The study also showed that the persistent campaign of interest rate increases by the European Central Bank is beginning to have an impact on consumers and the services industry.
This will raise issues for the bank, which meets on Thursday, as it balances its efforts to combat high inflation with the potential harm to the economy.
The S&P Global-compiled HCOB flash Composite Purchasing Managers' Index (PMI) for the euro area, which is seen as a reliable indicator of the state of the economy overall, fell to an eight-month low of 48.9 in July from June's 49.9.
That was lower than all forecasts in a Reuters survey, which had projected a slight decline to 49.7, and it fell below the 50-point threshold distinguishing expansion from contraction.
"The weakness was widespread across all sectors, but it was the manufacturing sector that posted another bad reading," said Paolo Grignani at Oxford Economics.
"Today's print confirms the deterioration in macroeconomic conditions is well underway and spreading from manufacturing to other sectors. In our baseline case we expect subdued growth for the second half of the year, but today's data suggest the risk of a small contraction in euro zone GDP in Q3 is increasing."
The largest economy in Europe, Germany, experienced a decline in activity in July, raising the prospect of a second-half recession.
Because both the services and industrial sectors performed worse than anticipated, the slump in France continued into July.
After the weaker than anticipated report, the euro dropped and the yields on the bloc's government bonds decreased.
Outside of the euro zone, the private sector in Britain contracted at its slowest pace in six months in July as orders from companies stalled in the face of rising interest rates and persistently high inflation.
The services PMI for the euro zone dropped to 51.1 from 52.0, the lowest reading since January, and below the 51.5 reading predicted by a Reuters survey.
Consumers who are heavily in debt reduced their spending as a result of increased borrowing rates and prices, and the services new business index fell below breakeven for the first time in seven months.
A PMI measuring the manufacturing sector of the bloc fell from 43.4 to 42.7. A modest increase to 43.5 was predicted by the Reuters survey.
The composite PMI's input index for gauging output dropped to its lowest level in more than three years.
Despite manufacturers clearing their backlogs of work and lowering their prices, the slump persisted. Because of a decline in the demand for resources and an increase in supply, factories saw a significant reduction in input costs.
"Input price pressures continued to ease, but this was almost entirely due to costs falling in the manufacturing sector, which in turn probably reflects lower energy prices as well as improved global supply conditions," said Jack Allen-Reynolds at Capital Economics.
The ECB's policymakers, who have failed to bring inflation back to their 2% objective despite implementing the most severe policy tightening schedule in the bank's history, will likely welcome any indication of easing pressures, despite the fact that pricing for services have proven to be more sticky.
According to all economists surveyed by Reuters, who forecast another increase in interest rates in September by a slim majority, they will increase rates by 25 basis points on Thursday, worsening the situation for consumers.
(Source:www.thedailystar.net)
The euro zone's two largest economies, Germany and France, both had broad-based declines and are now in contractionary territory, adding to concerns that the region may enter a new recession.
The study also showed that the persistent campaign of interest rate increases by the European Central Bank is beginning to have an impact on consumers and the services industry.
This will raise issues for the bank, which meets on Thursday, as it balances its efforts to combat high inflation with the potential harm to the economy.
The S&P Global-compiled HCOB flash Composite Purchasing Managers' Index (PMI) for the euro area, which is seen as a reliable indicator of the state of the economy overall, fell to an eight-month low of 48.9 in July from June's 49.9.
That was lower than all forecasts in a Reuters survey, which had projected a slight decline to 49.7, and it fell below the 50-point threshold distinguishing expansion from contraction.
"The weakness was widespread across all sectors, but it was the manufacturing sector that posted another bad reading," said Paolo Grignani at Oxford Economics.
"Today's print confirms the deterioration in macroeconomic conditions is well underway and spreading from manufacturing to other sectors. In our baseline case we expect subdued growth for the second half of the year, but today's data suggest the risk of a small contraction in euro zone GDP in Q3 is increasing."
The largest economy in Europe, Germany, experienced a decline in activity in July, raising the prospect of a second-half recession.
Because both the services and industrial sectors performed worse than anticipated, the slump in France continued into July.
After the weaker than anticipated report, the euro dropped and the yields on the bloc's government bonds decreased.
Outside of the euro zone, the private sector in Britain contracted at its slowest pace in six months in July as orders from companies stalled in the face of rising interest rates and persistently high inflation.
The services PMI for the euro zone dropped to 51.1 from 52.0, the lowest reading since January, and below the 51.5 reading predicted by a Reuters survey.
Consumers who are heavily in debt reduced their spending as a result of increased borrowing rates and prices, and the services new business index fell below breakeven for the first time in seven months.
A PMI measuring the manufacturing sector of the bloc fell from 43.4 to 42.7. A modest increase to 43.5 was predicted by the Reuters survey.
The composite PMI's input index for gauging output dropped to its lowest level in more than three years.
Despite manufacturers clearing their backlogs of work and lowering their prices, the slump persisted. Because of a decline in the demand for resources and an increase in supply, factories saw a significant reduction in input costs.
"Input price pressures continued to ease, but this was almost entirely due to costs falling in the manufacturing sector, which in turn probably reflects lower energy prices as well as improved global supply conditions," said Jack Allen-Reynolds at Capital Economics.
The ECB's policymakers, who have failed to bring inflation back to their 2% objective despite implementing the most severe policy tightening schedule in the bank's history, will likely welcome any indication of easing pressures, despite the fact that pricing for services have proven to be more sticky.
According to all economists surveyed by Reuters, who forecast another increase in interest rates in September by a slim majority, they will increase rates by 25 basis points on Thursday, worsening the situation for consumers.
(Source:www.thedailystar.net)
