Eurozone Private Sector Downturn Raises Recession Risk

(RTTNews) - Signaling the risk of a recession, the euro area private sector activity declined at the fastest pace in eight months in July as the downturn gathered pace at the start of the third quarter.

The HCOB composite output index dropped to an eight-month low of 48.9 in July from 49.9 in June, flash results of a closely watched S&P Global purchasing managers' survey showed on Monday.

A reading below 50 suggests contraction in the private sector that combines manufacturing and services.

This was the lowest score since last November. The reading was also below economists' forecast of 49.7.

The survey data was collected from July 11-20.

The services Purchasing Managers' Index, or PMI, hit a six-month low of 51.1, down from June's 52.0 and below the forecast of 51.5.

The manufacturing sector logged a steep contraction in July, which was the most severe in more than three years. The corresponding PMI posted 42.7 compared to 43.4 a month ago. The expected score was 43.5.

Demand conditions worsened across the board. The fall in new orders exceeded that of output at the fastest pace since February 2009, suggesting that companies will seek to reduce output again in coming months.

With the fall in new orders, backlogs of work fell at a faster rate as companies relied on previously placed orders to support current operating levels.

The deteriorating order book situation dented business confidence. Expectations of output for the coming year dropped to the lowest since last November. Confidence deteriorated in both manufacturing and services.

On weakening demand and waning confidence, companies pulled back on hiring in July. Employment logged the smallest monthly growth since February 2021.

Manufacturers reduced their inventory levels in line with lower production requirements. At the same time, supplier delivery times continued to improve at a rate not seen since 2009.

On the inflationary front, the survey showed that input cost inflation decreased again in July, with the rate lowest since November 2020. Average prices charged for goods and services grew at the slowest rate for 29 months.

"The latest PMI reading is not going to please ECB officials as prices in the private sector are still creeping up, led solely by the substantial services sector," HCOB Chief Economist Cyrus de la Rubia said.

"Thus, ECB president Christine Lagarde will certainly stick to her guns and hike interest rates by 25 bp at the next monetary meeting at the end of July," the economist added.

ING economist Bert Colijn said the July PMI suggests that recession risk has increased. The survey continued to signal moderating price pressures, but the impact of wages on services will remain a concern for ECB hawks, Colijn noted.

Among major member countries of euro area, France reported an especially steep downturn in output, which fell for a second successive month and at the sharpest rate since November 2020.

France's composite output index slid to 46.6 in July from 47.2 in the previous month. Contraction in output was the second in as many months, suggesting a sustained deterioration in economic conditions. The services PMI posted 47.4 compared to 48.0 in June. The manufacturing PMI declined to 44.5 in July from 46.0 in the prior month.

Germany also fell into contraction, as output dropped for the first time since January and at the sharpest rate since last November. At 48.3, the composite output index moved into sub-50 contraction territory for the first time since January. The reading was seen falling to 50.3 from 50.6 in June.

The services PMI registered 52.0, down from 54.1 in June as well as forecast of 53.1. The manufacturing PMI reached deep into negative territory, at 38.8 compared to 40.6 a month ago. The expected score was 41.0.