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Inflation eats into eurozone business activity

According to a closely monitored business survey, euro-zone activity growth slowed sharply in June, raising concerns that the fallout from Russia’s invasion of Ukraine could drag the bloc into recession.

S&P Global said its euro-zone flash composite purchasing managers index, which measures the pulse of business activity, fell to a 16-month low as manufacturing output and new orders fell as companies complained about high inflation, weak demand and political pressure. insecurity.

The news pushed European stock indices lower on Thursday, prompting traders to scale back their bets on how much the European Central Bank will raise interest rates this year, pushing government bond prices higher. The euro fell 0.7 percent against the dollar to $1.0497.

Christoph Weil, an economist at Commerzbank, said: “Today’s figures should prompt the ECB to raise interest rates rather cautiously.”

Economists believe the eurozone is in danger of slipping into recession later this year as Russia puts pressure on natural gas supplies to Europe, record inflation affects consumer spending and the ECB raises interest rates.

Jens Eisenschmidt, head of economics for Europe at Morgan Stanley, said the PMI data raised the prospect that an expected slowdown in the economy could come earlier than expected. A recession was “quite likely” if Russia continues to significantly cut natural gas supplies to Europe, creating potential shortages.

The European Commission said on Tuesday that its flash consumer confidence indicator for the eurozone had fallen 2.4 points this month to minus 23.6, the weakest since an all-time low recorded just after the Covid-19 crisis in April 2020 began.

“With price indices remaining extremely strong, the eurozone appears to have entered a period of stagflation,” said Jack Allen-Reynolds, an economist at Capital Economics, citing a combination of rising inflation and stagnant growth from the 1970s.

Line chart of the Eurozone Purchasing Managers Index showing companies hit by a sharp slowdown in Eurozone activity

The euro-zone composite PMI stood at 51.9 in June, down from 54.8 last month. The reading fell well short of consensus economists’ expectations of 54 to hit the lowest level since the pandemic still limited much of normal life in early 2021.

A PMI score of more than 50 indicates that most companies are reporting higher activity levels than they were a month ago. But S&P Global said its monthly survey of purchasing executives pointed to “an imminent downturn unless demand recovers.”

New orders for goods and services failed to grow for the first time since March 2021, it said, adding that manufacturers’ output fell for the first time in two years. A wave of tourism and recreation in April and May slowed “to near a halt” in June. Business expectations for the year ahead have fallen to their lowest level since October 2020.

Price pressures remained at near-record levels for euro-zone companies, despite growth slowing for the third straight month, suggesting a spike in inflation, according to S&P Global. Factory output “was limited by widespread supply shortages” caused by the war in Ukraine and Covid lockdowns in China.

The euro-zone services PMI fell to 52.8, a five-month low, while the manufacturing value hit a 22-month low of 52.

Confidence among French businesses fell to its lowest level in 19 months, with some complaining of heightened political uncertainty after President Emmanuel Macron lost control of the national assembly in last weekend’s parliamentary election.

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