The decline in demand is reflected in the activity of companies in the euro area

The third quarter of the year did not start with good expectations in the eurozone and the risk of recession became more acute, according to the PMI index prepared by S&P Global. Project Management Institute ( Purchasing managers indexes As for its English acronym) Composite for the region, it represents the largest decline in eight months and amounted to 48.9 points in July. In this indicator, a number below 50 points indicates an economic contraction, while above indicates growth in business activity. Although inflation took a breather – the input cost ratio, measured in both sectors, fell again for the tenth month in a row -, The high rate policy set by the European Central Bank It continues to weigh on demand, which complicates business development.

The sector suffering the worst is industry, staying at 42.7, its lowest in 38 months. “The manufacturing sector continues to be the Achilles’ heel of the eurozone,” says Cyrus de la Robbia, chief economist at Hamburg Commercial Bank. For its part, the services sector is still positive, as it scored 51.1 points, but it declined by 0.9 compared to the previous month, and its growth is not enough to compensate for the bad industrial data.

Vegas Consecutive price hikes And the looming threat of a recession makes the landscape difficult for entrepreneurs. Moreover, though July inflation eased to 5.5% According to Eurostat, the core rose by two dozen, removing the possibility of an outage of restrictive monetary policies. In fact, the future prospects of traders are diminishing, and when asked if the level of production of their companies is higher, the same or lower than the previous month, most of the answers are negative, leaving the industrial production index at 42.9 in July, compared to 44.2 in June.

In addition to the poor prospects for the future, the deterioration of demand conditions is the big problem for business activity. The document indicates that fewer new orders are coming in and it is the lowest moment since November last year. This has led companies to reduce their activity levels, which will have an expected negative impact on employment levels. The British company warns that the industrial sector is the most sensitive, with one of the sharpest declines since 2009. In the case of the services sector, it records in this seventh month the first drop in orders since December.

Hiring fell in July, leaving the smallest monthly increase in hiring since February 2021. By sector, manufacturing is losing jobs for the second month in a row and the services sector maintains employment, but with the lowest growth in five months. Another consequence of lower demand is lower purchases of inputs, which in the case of the industry have fallen to 2009 levels.

France and Germany are slowing down

The two largest economies in the eurozone are not experiencing their best moments either. In France, overall activity decreased for the second month in a row and recorded this at the highest intensity rate since 2020. Its composite index reached 46.6 points, and services (47.4) and industry (44.5) were in the negative zone. Among the reasons, Hambug Commercial Bank economist Norman Lipke points to a decline in exports since “prices have continued to rise at a very high rate”. It is also necessary to consider that the return of the euro against the dollar. It fell 0.4% to $1,108, which could improve the competitiveness of exports but worsen the profitability of imports.

Germany too in the contraction zone. The recession of the German economy, which contracted, according to the statistics office “Distatis”, by 0.3% during the first quarter, is due to the difficulties of industry and weak private consumption.

The composite PMI fell from 50.6 in June to 48.3 in July. In this case, the manufacturing sector was hit hard, scoring 38.8 points and falling behind services. On the other hand, the latter remained positive with 52 points. The report indicates that the decline of German industry is the most serious since 2009, if the Covid period is excluded. “There are increasing chances that the economy will enter a recession in the second half of the year,” de la Robbia said. The economist pointed out that German GDP growth forecasts for the third quarter point to negative growth.

Economic deterioration, according to the chief economist of the Hamburg Commercial Bank, will be the trend in the medium term: “It is likely that the eurozone economy will continue its downward trajectory into deflationary territory in the coming months, given that the services sector – which has been recording the best data so far – is still losing momentum,” he concluded.

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