Euro zone: the economy contracts, weighed down by inflation

Economic activity in the euro zone contracted in July in the private sector, down for the first time since February 2021, under the effect of still high inflation, according to the composite PMI index published on Friday by S&P Global. .

The index, calculated on the basis of business surveys, fell to 49.4, its lowest level for 17 months, once morest 52 in June and 54.8 in May. A figure above 50 signals an increase in activity, while an index below this threshold signals a contraction.

‘If we exclude the periods of sanitary confinement (due to the Covid-19 pandemic), this is the first drop in overall activity since June 2013 (…) and the outlook for activity at twelve months fell to one of their lowest levels in a decade,” said Chris Williamson, chief economist for S&P Global.

Businesses are worried regarding soaring inflation and tensions over energy supplies, the darkening economic situation both in Europe and on their export markets, but also regarding the tightening of financial conditions in the time when the European Central Bank (ECB) raises its rates, underlines S&P Global in a press release.

‘The situation is most worrying in the manufacturing sector’, with a PMI falling to 46.1, ‘as a lower than expected volume of new orders led to an unprecedented rise in unsold inventories’, while that eroding demand in the face of rising prices ‘might cause manufacturers to cut production levels further,’ says Mr Williamson.

For its part, the services sector, with a PMI of 50.6 reflecting a virtual stagnation in activity, saw the rebound recorded following the end of the confinements reduced to nothing. “Concerned regarding the rising cost of living and deteriorating economic conditions, customers are hesitant to incur new expenses,” says the analyst.

The decline in activity in the euro zone in July corresponds to a quarterly decline in GDP of around 0.1%, ‘i.e. a marginal rate of contraction for the time being but which, given the sharp decline in new orders (…) and the deterioration of the outlook for activity, should accelerate in the coming months’, warns S&P Global.

Within the euro zone, it is in Germany that the decline in activity is the most marked, with a decline in the PMI index to 48, i.e. the lowest level since June 2020. In France, activity continued to rise, but at an extremely slow pace, with a PMI of 50.6 in July.

/ATS