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Inflation eats into eurozone business activity

Growth in eurozone business activity suffered a sharp slowdown in June, according to a closely watched survey of companies, intensifying concerns that the fallout from Russia’s invasion of Ukraine could drag the bloc into recession.

S&P Global said its flash eurozone composite purchasing managers ‘index, which takes the pulse of business activity, fell to a 16-month low as manufacturers’ output and new orders both fell and companies judged high inflation, weak demand and political uncertainty.

The news pushed European share indices lower on Thursday and prompted traders to scale back their bets on how much the European Central Bank will raise interest rates this year, sending government bond prices up. The euro fell 0.7 per cent 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 risks falling into a recession later this year as Russia squeezes natural gas supplies to Europe, record inflation eats into consumer spending, and the ECB raises interest rates.

Jens Eisenschmidt, chief Europe economics at Morgan Stanley, said the PMI data raised the prospect that an anticipated stalling of the economy could arrive sooner than expected. A recession was “rather likely” if Russia continues to significantly cut the supply of natural gas to Europe, creating potential shortages.

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

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

The composite PMI for the eurozone in June was 51.9, down from 54.8 last month. The reading fell well below the consensus economists’ expectations of 54 to hit its lowest level since the pandemic was still restricting much of normal life in early 2021.

A PMI score above 50 indicates that a majority of businesses are reporting higher activity levels than a month ago. But S&P Global said its monthly survey of purchasing managers pointed to “an imminent downturn unless demand revives”.

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 surge in tourism and recreation activity in April and May slowed “to near a standstill” in June. Business expectations for the year ahead fell to the lowest since October 2020.

Price pressures remained at near record levels for eurozone companies, despite growing at a slower rate for the third consecutive month, which S&P Global said “hinted at a peaking in the rate of inflation”. Factory output “continued to be constrained by widespread supply shortages” caused by the war in Ukraine and Covid lockdowns in China.

The PMI for eurozone services fell to a five-month low of 52.8, while the reading for manufacturing hit a 22-month low of 52.

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

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