Business activity in the euro area is deteriorating faster than expected, particularly in the service sector, according to revised data for August by S&P Global. The overall Purchasing Managers’ Index (PMI), which encompasses both industry and services, plummeted to 46.7 points in August from July’s 48.6, marking its lowest level since November 2020. This worse-than-anticipated result suggests the eurozone may be heading into a recession.
A PMI value above 50 signifies growth, while a score below 50 indicates declining activity. The sub-index for the services sector dropped to 47.9 points, down from July’s 50.9, indicating contraction. The decline is also more severe than earlier estimates. Rising interest rates have made debt repayment more costly for many in the eurozone, while high inflation has increased the cost of living and prompted people to save, reducing consumer spending.
Although the manufacturing sector’s decline has moderated slightly, it remains below the 50-point growth threshold. The manufacturing sub-index for August rose to 43.5 points, a three-month high, but still signifies contraction. Firms appear cautious about hiring, as the employment sub-index dipped to 50.2 in August, indicating limited and careful hiring.
Today’s data from Eurostat, the statistics office, further underscores economic challenges, reporting a 0.5% decline in industry producer prices in July compared to the previous month, with a year-on-year drop of 7.6%. This trend could align with the European Central Bank’s efforts to curb inflation by raising interest rates and managing aggregate demand.