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Fears of a eurozone recession are growing as business activity eases again

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News Tech: According to a benchmark poll of firms, the euro zone’s business activity had its worst contraction in 18 months, escalating concerns about an impending recession.

A much greater decrease had been anticipated by economists surveyed by Reuters. However, the survey brought attention to the difficulties the euro zone economy is currently facing after German businesses reported their greatest reversal in activity in more than two years, while French businesses had their first contraction in 18 months.

The composite purchasing managers’ index from S&P Global dropped 0.7 points to 49.2 on Tuesday, the lowest reading since February 2021 and below the crucial 50-point threshold that distinguishes expansion from contraction for a second consecutive month.

The data, according to Andrew Harker, head of S&P Global Economics, “suggests that the economy is declining in the third quarter.” The recovery in services following the easing of pandemic restrictions has faded due to cost-of-living pressures, he continued, while manufacturing was still in contraction in August.

Euro zone government bonds sold off on Tuesday, reflecting a belief that the economic downturn will not be enough to prevent the European Central Bank from raising the deposit rate from zero to 0.5% at its meeting next month. Italy’s 10-year bond yield rose to 3.65%, a two-month high.

New orders for services and manufacturing in the euro zone fell for a second straight month, data from S&P Global showed, as factories grappled with the biggest increase in inventories of unsold products in the 25-year history of the survey. “Output has fallen particularly sharply in the basic materials category and in the automotive sector, but also in some services sectors, including tourism, entertainment and real estate,” it said.

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The survey also found evidence of easing inflationary pressures, as input costs and selling prices both rose at their slowest pace in nearly a year. Supply chain constraints have also eased as delivery times have grown at their slowest pace since October 2020. It found that the decline in business activity was concentrated in Germany and France, while output in other euro zone countries continued to rise, “albeit only marginally”.

Germany’s PMI fell 0.5 point to 47.6, a slightly smaller-than-expected drop, to its lowest level since June 2020, as a sharp drop in the services index offset an improvement in manufacturing. “German GDP may not have fallen in the second quarter, but it will almost certainly fall in the third, and we doubt it will be able to avoid a technical recession this year,” Melanie Debono, economist at Pantheon Macroeconomics, said in a note to clients.

France’s PMI fell more than expected, falling 1.9 points to 49.8, as activity was hit by a sharp slowdown in the services sector.

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