Fears that the 19-nation single currency zone is heading for a sharp recession were boosted by S&P Global’s flash composite euro zone purchasing index for July, which on Friday showed output and new orders fell for the first time since the 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 gas supplies in 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 firms across the eurozone, fell to a 17-month low of 49.4, down from 52 in June. Economists polled by Reuters had expected 51 readings. It is the first time the index has fallen below the critical 50 mark that separates growth from contraction since February 2021, when businesses were still dealing with Covid-19 restrictions. The euro slipped on the report, down 0.7% against the US dollar at $1.015. German 10-year bond yields also fell to 1.07 percent, the lowest since May, on growing expectations that the recession will force the ECB to stop raising interest rates earlier than expected. The yield on Italy’s 10-year bond also fell, but the spread with Germany widened to 2.3 percentage points, near last month’s three-year high. Melanie Debono, economist at Pantheon Macroeconomics, said: “An economic slowdown could well mean the central bank will raise interest rates less than markets expect, but more hikes are coming nonetheless.” The PMI score for the euro zone’s manufacturing sector fell more than expected to 49.6, while the reading for the larger services sector showed that it managed to hold on to modest growth at 50.6. “The eurozone economy looks poised to contract in the third quarter as business activity eased in July and forward-looking indicators point to worse in the coming months,” said Chris Williamson, chief economist at S&P Global Market Intelligence. Factories cut supplies after experiencing “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. He added: “Consumer-oriented services such as tourism and leisure, media and transport saw either delayed growth or an outright decline.” Companies took a more cautious approach to hiring, and business expectations for the coming year fell to their lowest level since May 2020. Inflationary pressures and supply bottlenecks eased, but companies continued to hike prices. The ECB published its survey of professional forecasters on Friday, showing they had cut their expectations for eurozone growth and raised them for inflation. The 56 respondents forecast gross domestic product growth of 1.5 percent next year, down from a forecast of 2.3 percent in April. Their forecast of 2.8 percent growth for this year was down 0.1 percentage point from their previous forecast. They expect inflation to peak at 7.3% this year and remain above the ECB’s 2% target for the next two years, while they raised their long-term forecast for price growth from 2.1% to 2.2%. Analysts said this likely contributed to the ECB’s 50 basis point hike. Consumer confidence in the bloc fell to a record low this month as households grappled with rising energy and food prices, according to the European Commission’s latest survey published on Wednesday.
