Business survey shows eurozone economic slowdown deepens in July

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The eurozone’s economic downturn could deepen as early as the third quarter, with a closely-watched business survey suggesting the region’s economy is shrinking.

The HCOB Flash Eurozone Composite Purchasing Managers’ Index, which measures the activity of companies in the Group of 20 countries, fell to an eight-month low in July after a slower-than-expected slowdown in the services and manufacturing sectors.

Demands for the European Central Bank to stop raising interest rates are expected to increase later this week. The euro fell 0.5 per cent to $1.107 against the US dollar, while Germany’s rate-sensitive two-year bond yield eased 6.5 basis points to 3.03 per cent as investors bet against further rate hikes after this Thursday’s 25bp move.

It fell to 48.9 from 49.9 in the previous month. PMI Index It also fell below the 50 mark that separates contraction from expansion and raised fears of a possible recession in the eurozone economy after two quarters of mild contraction.

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

“The eurozone economy will likely slide further into contraction territory in the coming months, as the services sector continues to decelerate,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. He said there was an “increasing likelihood” of the German economy slipping into recession in the second half of this year.

The services sector remained in the growth zone despite a fall in the PMI to a six-month low of 51.1. The decline in the manufacturing sector deepened when its reading fell to a 38-month low of 42.7.

Weak demand led to the biggest decline in manufacturing orders since 2009, while the services sector suffered its first drop in orders in seven months. Job growth continued, albeit at the slowest pace in more than two years.

The sign of a weakening economy came days before the ECB is expected to raise its benchmark rates to combat extremely high inflation.

Economists believe this week could mark the end of the ECB’s 12-month monetary tightening cycle if the eurozone economy continues to weaken.

However, the central bank has said in recent weeks that it is concerned that higher wage growth and rising services prices could keep inflation above the 2 percent target for a long time.

Factory gate prices in the Eurozone manufacturing sector have decreased sharply, in contrast to a sustained increase in services prices, reflecting companies passing on higher labor costs to customers. However, the rate of inflation in services was the lowest since October 2021.

Claus Wittesen, an economist at research group Pantheon Macroeconomics, said the PMI survey would be “hard work for the pigeonhole” in case the ECB halts its rate hikes after this week. But he said “poor” second-quarter wage growth could prompt rates to be raised again in September.