Eurozone falls into contraction in July, confirming recession worries

Autor: Financial Market
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The seasonally adjusted Eurozone PMI Composite Output Index fell from 52.0 in June to 49.4 in July, according to the ‘flash’ reading.

By dropping below the neutral 50.0 level, the July PMI signals a contraction of business output for the first time since February 2021.

The steepest decline was recorded in Germany, where the composite PMI of 48.0 sank to its lowest since June 2020. Although output continued to rise in France, the pace of growth slowed sharply as the composite PMI fell to 50.6 to register only a marginal improvement and the weakest expansion in 16 months.

The rest of the region as a whole meanwhile recorded a marginal contraction of output, the composite PMI dropping to 49.9 to represent the first deterioration since February 2021.

By sector, manufacturing output fell especially sharply, dropping for a second successive month with the rate of decline accelerating to the fastest since May 2020. Barring COVID-19 lockdown periods, the July drop in factory output has not been exceeded since December 2012.

Steepening factory downturns were recorded in both Germany and France while the rest of the region slipped into decline for the first time for just over two years.

Service sector output continued to rise, but the rate of expansion has slowed sharply over the past three months to near-stagnation and the weakest since April 2021.

The principal drag was a drop in service sector activity in Germany, accompanied by slower rates of growth in France and the rest of the euro area as a whole. New orders for goods and services meanwhile fell solidly, dropping for the first time since February 2021.

Excluding COVID-19 lockdown periods, the latest fall in new orders is the steepest since May 2013. New orders for goods have now fallen for three successive months, the rate of loss accelerating sharply to the steepest since May 2020.

The fall in orders for goods was accompanied by the first drop in new orders for services recorded since April 2021. Looking into further detail, the manufacturing downturn was broad-based but led by chemical and resources firms, as well as vehicle makers.

Within the service sector, consumer-oriented services such as tourism and recreation, media and transportation saw either stalled growth or outright declines, contrasting with the growth surge seen in the spring when Omicron-related containment measures were withdrawn.

Companies often blamed the rising cost of living as well as adverse weather conditions. Output also fell sharply in banking and real estate, commonly linked to tightening financial conditions. While output of industrial services continued to rise, the increase was among the smallest since the early-2021 lockdowns.

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Although factory output was again constricted in many cases by component shortages, the overall incidence of supply delays continued to moderate. Average suppliers’ delivery times lengthened in July to the least extent since October 2020.

This easing of supply chain pressure largely reflected the biggest monthly drop in purchasing of inputs by manufacturers since the initial pandemic lockdowns of early-2020.

This steep reduction in input buying by factories in turn reflected a large rise in warehouse inventories of inputs and the largest build-up of unsold finished goods ever recorded by the survey, often linked to lower than anticipated sales to customers and weakened order books.

Backlogs of work fell across both manufacturing and services, declining for the first time in almost one-and-ahalf years, reflecting the recent weakening of demand from customers and hinting at the build-up of excess capacity.

Overall jobs growth moderated for a second month running to a 15-month low as firms took more cautious approaches to hiring amid the deteriorating demand environment.

Payroll growth cooled in both manufacturing and services to run at sharply reduced rates compared to May’s recent peaks. Looking at prices, average charges for goods and services continued to rise sharply in July, though the rate of inflation cooled for a third month in a row from April’s all-time high to reach the lowest since February.

Rates of selling price inflation eased in both manufacturing and services. The overall rate of increase nonetheless remained significantly higher than anything seen prior to the pandemic over the two decade series history.

Input cost inflation also cooled, down for a fourth successive month to sit at the lowest since February, yet still significantly exceeded pre-pandemic highs. Manufacturing input cost inflation slowed especially sharply, down to the lowest for nearly one-and-a-half years, reflecting lower prices for many commodities, notably including oil.

Service sector input cost inflation exceeded that of manufacturing for the first time in 21 months, despite moderating to a five-month low, boosted by rising energy and wage costs.

Finally, business expectations for the year ahead fell to the lowest since May 2020, dropping to a level rarely exceeded in the past decade.

Manufacturing expectations worsened to such an extent that more firms expect to cut output than increase production in the coming year, a
situation not seen since the early days of the pandemic.