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Eurozone businesses have been hit by sharp falls in output and new orders, according to a closely watched survey that raises doubts over whether the European Central Bank will raise interest rates next month.
The HCOB flash eurozone composite purchasing managers’ index, a measure of activity at companies across the 20-country bloc, fell to a 33-month low of 47 after a sudden contraction of services activity and continued decline in manufacturing in August.
By falling from 48.6 in the previous month, the index sank further below the 50 mark that separates contraction from expansion and increased fears of a slowdown during the second half of this year.
The flash reading was well below the slight decline to 48.5 forecast by economists in a Reuters poll.
Investors bet the grim economic outlook made it less likely the ECB would raise interest rates again at its meeting next month. The euro fell 0.3 per cent against the dollar to $1.108, while Germany’s rate-sensitive two-year bond yield declined 6.8 basis points to 3 per cent.
The survey also found that companies reported a reversal of the recent declines in inflationary pressures. Average prices companies charge for goods and services accelerated for the first time in seven months, pushing the rate back above the long-run average.
Input costs continued to fall for manufacturers, but the survey found “a slight upturn” in costs for services companies linked to rising wages and fuel prices.
“The continuing sharp drop in the PMI data will test the ECB’s growth optimism,” said Mark Wall, chief European economist at Deutsche Bank. “We are expecting the ECB to pause in September, but it is not clear that inflation is where the ECB wants it yet. A pause should not be misinterpreted as the peak.”
The decline in the eurozone PMI reading to its lowest level since November 2020 reflected a sharp downturn in the services sector, where activity contracted for the first time since December. That adds to a continued, albeit less severe, contraction of the manufacturing sector.
“The service sector of the eurozone is unfortunately showing signs of turning down to match the poor performance of manufacturing,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
The third consecutive monthly fall in overall new business inflows, which excluding the pandemic fell at the fastest rate since 2012, prompted manufacturers to continue shedding jobs and led to a slowdown in hiring in the larger services sector.
German companies suffered the steepest decline in activity for more than three years, taking the country’s PMI reading to a 38-month low after falling new orders, declining business output and shrinking inventories took their toll in August.
The French PMI score remained deep in contraction territory at 46.6, as services activity in the country slid to a 30-month low and manufacturers continued to report heavy declines, albeit slightly less severe than in July.
Andrew Kenningham, an economist at consultants Capital Economics, said the decline in services activity suggested “the rebound in tourism and hospitality is fizzling out”. He added: “There are plenty of reasons to expect the eurozone economy to head into recession in the second half of the year, with Germany likely to be the worst performer”.
UK economic activity also declined more than expected in August, according to the S&P Global / Cips Flash UK composite output index, which fell to 47.9 in August, down from 50.8 in July, dropping below the neutral 50 threshold for the first time since January.
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