Eurozone recession fears grow as business activity declines again

Eurozone business activity has suffered its biggest contraction for 18 months as a result of higher prices, falling demand and rising inventories of unsold goods, according to a benchmark survey of companies, which has added to fears of an impending recession.

S&P Global’s flash composite purchasing managers’ index on Tuesday fell 0.7 points to 49.2, its lowest level since February 2021 and the second consecutive month below the crucial 50 mark that separates growth from contraction 

Economists polled by Reuters had expected a slightly bigger fall. But the survey underlined the challenges confronting the eurozone economy after German businesses reported their biggest reversal of activity for more than two years, while French businesses suffered their first contraction in 18 months.

Andrew Harker, economics director at S&P Global, said the data “point to an economy in contraction during the third quarter”. He added: “Cost of living pressures mean that the recovery in the service sector following the lifting of pandemic restrictions has ebbed away, while manufacturing remained mired in contraction in August.”

Tourism and hospitality-related services were boosted this summer by the lifting of most coronavirus restrictions in Europe, but the benefits appear to have been cancelled out for many companies by a rising number of countering factors.

Russia is squeezing natural gas supplies to Europe, causing record eurozone inflation, eroding household spending and hitting business investment while forcing the European Central Bank to raise interest rates and convincing many economists that the eurozone is heading for recession.

“August’s flash PMIs suggest that 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 press ahead with monetary tightening even as the economy falls into recession”.

Eurozone government bonds sold off on Tuesday reflecting a belief that the economic downturn will not be enough to deter the ECB from raising its deposit rate from zero to 0.5 per cent at next month’s meeting. Italy’s 10-year bond yield rose to 3.65 per cent, 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, leaving factories grappling with the biggest increase in inventories of unsold products in the 25-year history of the survey.

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

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

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

The PMI reading for Germany fell 0.5 points to 47.6, a slightly smaller decline than expected 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 all but certainly do so in the third quarter, and we doubt it will be able to avoid a technical recession this year, Melanie Debono, an economist at Pantheon Macroeconomics, said in a note to clients.

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