Eurozone activity shrinks for second month on price pressures

Economic activity in the euro zone eased for a second month, suggesting fears of a recession may already be taking hold as record inflation weakens demand and weakness seeps into more and more sectors.

While August’s decline was driven by manufacturing, the post-lockdown recovery in services like tourism almost stalled as consumers face sharp increases in energy and food costs, according to S&P Global business surveys.

The data “points to a contracting economy in the third quarter,” S&P Global economist Andrew Harker said in a statement on Tuesday. “A decline in output is now evident across a range of sectors, from basic materials and auto companies to tourism and real estate companies, as the economic weakness becomes broader-based.”

Germany has been a particular pain point, posting its sharpest drop in production since June 2020 as it rushes to reduce its reliance on Russian natural gas as post-war Ukraine supplies dwindled. In France, on the other hand, activity fell for the first time in a year and a half.

Production continued to rise elsewhere — “albeit marginally,” S&P Global said.

“The composite PMI for the euro zone suggests that the monetary union economy is slipping towards recession under the weight of rising energy costs, and the worst is likely yet to come. However, Bloomberg Economies does not believe that the economic weakness will deter the European Central Bank from imposing another big rate hike in September,” said David Powell, Bloomberg Senior Economist for the eurozone.

The situation poses a dilemma for the European Central Bank, which is raising interest rates to curb the hottest inflation in decades, even as uncertainty about the outlook runs high and economic momentum is fading.

The survey found at least some signs that price pressures are peaking, with both input and output cost growth slowing down.

“This should help feed through to slower consumer price inflation later in the year, although any relief from the inflationary situation appears too late to provide any real support for demand,” Harker said. “The remainder of 2022 is therefore expected to be a struggle for companies across the Eurozone.”

Other parts of the world are also seeing downturns. Data earlier Tuesday showed activity in Japan and Australia, although economists are forecasting improvements in US manufacturing and services, and the UK remained in expansionary territory. Eurozone activity shrinks for second month on price pressures

Fry Electronics Team

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