Economic activity in the Eurozone unexpectedly contracted in July due to a worsening industrial slowdown and a near-stalling of growth in the service sector as consumers cut back on spending due to rising expenses, according to a survey released on Friday.
The S&P Global Eurozone Manufacturing (PMI) fell to 49.4 in July from 52.0 in June, considerably below all estimates in a Reuters poll, which projected a more modest drop to 51.0.
This month’s preliminary estimate was the lowest since February 2021, indicating a contraction.
In response to the rising cost of living, consumers have become more cautious and have reduced their non-essential expenditure, resulting in the lowest services new business index since February of last year at 48.4.
“The euro zone economy looks set to contract in the third quarter as business activity slipped into decline in July and forward-looking indicators hint at worse to come in the months ahead,” said Chris Williamson, chief business economist at S&P Global.
“Excluding pandemic lockdown months, July’s contraction is the first signaled by the PMI since June 2013, indicative of the economy contracting at a 0.1% quarterly rate.”
The European Central Bank surprised the market with a 50 basis point rate hike on Thursday, bringing its policy rate to zero.
The ECB had kept its benchmark at a negative territory since 2014 amid the region’s sovereign debt crisis and the coronavirus pandemic. Thursday marked the first rate hike in 11 years in a sign of acknowledgment on rising inflation in the bloc.