Growth in business activity slows as central banks battle inflation

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Good evening.

Today’s “flash” estimates of business activity from global PMI surveys for June paint a picture of, at best, a slowing global recovery, and in the eurozone, a sharp slowdown.

The composite PMI reading for the EU single currency bloc fell to a five-month low of 50.3, where 50 marks the dividing line between activity shrinking and expanding, damping hopes of an economic rebound after two quarters of mild recession.

“This is a severe slowdown,” said Carsten Brzeski, an economist at Dutch bank ING. “It shows the ECB forecasts were utterly over-optimistic. We are clearly heading for another weak quarter, with a possible flirtation with recession again.”

The biggest surprise was the sharp slowdown in services, one of the few positive areas for much of this year, although there was evidence that price pressures were cooling. The result could instil a note of caution in the European Central Bank about further interest rate rises following a “very likely” increase in July.

The eurozone data knocked back stocks, leading European shares to their worst week since March as interest rate rises fuel fears of recession.

A slowdown in the services sector was also evident in the UK as businesses raised prices. Data on Wednesday showed inflation stuck at 8.7 per cent in May, the fourth month in a row that prices have topped forecasts, with the “core” measure still increasing. The overall PMI score for the UK hit a three-month low of 52.8.

In the US, the PMI reading also hit a three-month low of 53.0, highlighting a stuttering recovery. Manufacturing shrank while the service sector showed a slower, but still solid, upturn in output. Jobs growth, meanwhile, sank to the slowest since January.

Elsewhere, Japan’s PMI hit a four-month low of 52.3, while Australia eked out growth with a score of 50.5.

All of which adds up to one giant headache for the world’s central banks as they enter a new phase in their battle with inflation.

Although headline figures have fallen back sharply in many economies, core inflation, which excludes volatile items such as energy and food, remains at or close to multi-decade highs, fuelling concern that policymakers will struggle to hit their targets without wiping out growth.

“The next leg of the improvement in the inflation numbers is going to be harder,” said Carl Riccadonna, chief US economist at BNP Paribas. “It requires more pain, and that pain likely involves a recession in the back half of the year.”

Need to know: UK and Europe economy

Inflation may be high but UK retail sales grew unexpectedly last month, boosted by spending on summer clothing and outdoor goods.

There was more disappointing news from Germany, home of Europe’s largest property market, where house prices fell by a record 6.8 per cent in the first quarter.

The EU agreed on an 11th package of economic sanctions against Russia including unprecedented new powers to punish countries suspected of helping Moscow evade existing restrictions.

One of the last pipelines carrying Russian gas to Europe could be shut off by the end of next year when Ukraine’s supply contract with Gazprom expires, the Ukrainian energy minister told the FT. The route accounts for almost 5 per cent of Europe’s total gas imports.

Turkey almost doubled its main interest rate from 8.5 per cent to 15 per cent, breaking with previous policies that had stoked inflation and sent foreign investors fleeing. Investors, however, remain sceptical.

Need to know: Global economy

The World Bank will allow countries hit by disasters to pause loan repayments, in a win for a campaign led by Barbados prime minister Mia Mottley. Kenya’s president William Ruto called for the creation of a global green bank, separate from the World Bank and IMF, warning that traditional multilateral lenders were “hostage” to rich world interests and unable to solve the climate crisis.

A Big Read details how the US quietly pressured discontented politicians and generals to respect last year’s Brazilian election victory of Luiz Inácio Lula da Silva over Jair Bolsonaro. Bolsonaro is facing a potential eight-year ban from office as a court decides whether he abused his presidential powers.

Zambia is on the verge of a debt restructuring deal after years of delays. Africa’s second-biggest copper producer had been left in financial limbo since its 2020 default, unable to continue accessing a $1.3bn IMF bailout, as China and other lenders clashed over proposals to reduce the value of its debts.

Guatemala votes for a new president on Sunday, but with several opposition candidates disqualified from standing, rights groups have warned that Central America’s largest economy is sliding towards authoritarianism.

Need to know: business

A flurry of deals at the Paris Air Show have confirmed that the aviation industry is back in business after the pandemic although supply chain challenges remain.

Microsoft began its court showdown with US regulators over its $75bn Activision deal. The Federal Trade Commission is blocking the deal pending the outcome of a separate antitrust challenge.

A realignment of the container shipping business has important implications for the future pattern of globalisation. Our Big Read explains.

Harvard’s Hal Scott warned that investors were at risk because of a lack of regulation around the US crypto industry.

The Church of England ditched oil majors from its endowment and pension funds over climate concerns.

The City of London is planning to fast track applications to convert unused older offices to new uses to minimise the amount of “stranded assets” lying empty. Office demand in the central financial district is projected to grow by up to 2mn sq ft in the next decade, with fierce competition for buildings with the best facilities and environmental credentials.

Science round-up

The EU plans to lift controls on some genetically modified crops to help farmers cope with climate change, a move likely to reignite a debate about the controversial techniques.

Why are global sperm counts falling? Read our interview with Shanna Swan, the scientist who has been investigating the impact of chemicals on human fertility for decades.

Synthetic embryos could shed light on infertility and pregnancy loss, but updated regulation is essential, says commentator Anjana Ahuja, who asks the question: Where does tissue end and life begin?

Science editor Clive Cookson explains why marine scientists have for decades been drawn to the depths of the world’s oceans.

US regulators are considering clearing a treatment for muscle-wasting disease Duchenne muscular dystrophy, despite lack of “unambiguous evidence” that it works.

Scientists are trying to work out why increasing numbers of young people in the developed world are being diagnosed with cancer. An FT Big Read tries to uncover what’s going on.

Something for the weekend

Try your hand at the range of FT Weekend and daily cryptic crosswords.

Some good news

UN member states have adopted a landmark marine biodiversity agreement on the high seas following nearly two decades of negotiations.