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The outlook for the eurozone economy has worsened after business activity retreated more than expected this month, according to a closely watched survey of companies.
S&P Global’s latest monthly poll of purchasing managers across the single currency zone added to fears of an economic contraction by revealing a sharp drop in new business orders, the first fall in employment for two-and-a-half years and a cooling of price pressures.
The HCOB flash eurozone composite purchasing managers’ index, a measure of activity at companies across the 20-country bloc, fell to a 35-month low of 46.5 after contraction of activity in both the services and manufacturing sectors.
The result was further below the 50 mark that separates contraction from expansion than the 47.4 reading forecast by economists in an earlier Reuters poll.
“This isn’t pretty,” said Claus Vistesen, an economist at Pantheon Macroeconomics, adding that the PMI survey was “pointing to a clear downshift in growth in the second half of the year”.
S&P Global said the fifth consecutive monthly decline in eurozone business activity was the steepest since November 2020. Excluding the months affected by pandemic lockdowns, it was the heaviest fall for a decade. Backlogs of orders shrank at the fastest rate since June 2020. The rate of companies’ selling price inflation was the lowest since February 2021.
Falling business activity and lower demand led to the first decline in employment since early 2021, it said, adding to growing signs of job-cutting in the region’s labour market, which has hitherto remained resilient.
The eurozone economy has stagnated or produced only tepid growth since the final months of last year and some economists expect a quarter-on-quarter contraction in gross domestic product when data is released for the July to September period on October 31.
The bloc’s economy has been hit by falling exports and a sharp rise in fuel prices that has hit production in energy-intensive industries particularly hard. Europe’s deteriorating economic outlook contrasts with signs of more resilient growth in the US.
“In the eurozone, things are moving from bad to worse,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “We wouldn’t be caught off guard to see a mild recession in the eurozone in the second half of this year with two back-to-back quarters of negative growth.”
In one of the few chinks of hope from the PMI survey, there was “a marginal improvement” in companies’ outlook for their output in the coming year, particularly in the services sector, “though the overall level of sentiment remained among the worst seen over the past year,” said S&P Global.
The deteriorating growth outlook reinforced expectations that the European Central Bank would call a halt to its recent interest rate rises for the first time in 15 months when it meets in Athens on Thursday. “Another ECB interest rate hike in the coming months is becoming increasingly unlikely,” said Christoph Weil, an economist at German lender Commerzbank.
Adding to the gloomy outlook, the ECB published its quarterly survey of commercial banks on Tuesday, showing they had tightened their lending standards further in the third quarter, while demand for new borrowing by households and businesses also declined.
“Cumulative net tightening since 2022 has been substantial, which is consistent with the ongoing significant weakening in lending dynamics,” it said.
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