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A majority of eurozone businesses reported continued falls in activity and new orders this month, according to a closely watched survey that signals a likely economic contraction.

At 47.1, the headline figure for the eurozone purchasing managers’ index was marginally better than August’s level of 46.7 but remained far below the key 50 mark.

The HCOB flash composite PMI, a key measure of activity at companies across the 20-country eurozone, also reported the fourth successive monthly decrease in new orders, which it said was “the most pronounced since November 2020”.

S&P Global, which compiled the survey, said manufacturing demand continued to fall but orders also declined in the service sector, which suffered the sharpest fall in new business since the pandemic.

The overall PMI reading was above the slight decline to 46.5 forecast by a Reuters poll. However, economists said the survey still showed activity was weakening after eurozone output barely grew over the past nine months.

Readings above 50 indicate that companies reported increased activity compared with the previous month; figures below 50 signal contraction.

“A recession is becoming increasingly clear in the euro area,” said Christoph Weil, an economist at German lender Commerzbank. “A further increase in the key interest rate is becoming increasingly unlikely.”

Investors also bet that the grim economic outlook made it more likely that last week’s quarter-point interest rate rise by the European Central Bank would be its last. The euro fell 0.2 per cent against the US dollar to a six-month low of $1.064 after the flash PMI release.

In a speech in New York shortly before the PMI data was released, ECB chief economist Philip Lane said that risks to economic growth were “tilted to the downside”, with manufacturing activity “set to remain weak” and “clear signs of a slowdown” in services. 

In his strongest signal to date that ECB interest rates had peaked, Lane said the bank’s models showed that inflation was on track to reach its 2 per cent target as long as the deposit rate was maintained at its current level of 4 per cent “for a sufficiently long duration”. 

There was an even sharper drop in UK business activity, according to the S&P Global/Cips purchasing managers’ index, which fell more than expected to 46.8 in September, down from 48.6 in August, the lowest level for 32 months.

Line chart of composite purchasing managers’ index (above/below 50 = expansion/contraction) showing eurozone PMIs signal contraction, adding to recession fears

“The numbers for PMI services in the eurozone paint a grim picture, but it’s not all doom and gloom,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, noting that hiring by services companies picked up slightly in September. “Having said this, we expect the eurozone to enter a contraction in the third quarter.”

Companies said their costs increased at a faster pace in September, mainly because of rising wages in the services sector and higher fuel costs. But in a more encouraging sign for the ECB’s efforts to tame inflation, “weakening demand” led companies to increase their selling prices at the slowest pace since February 2021. 

Line chart of Composite purchasing managers’ index - output prices (above 50 = rising) showing Eurozone prices rose at the slowest pace for more than two and half years

“Manufacturing output prices fell at a marked and accelerated pace, while services charge inflation eased to a 25-month low”, S&P Global said.

French business activity weakened more than expected, as its PMI score fell to an almost three-year low of 43.5, while the decline in German activity eased slightly as its PMI score rose to 46.2.

Lane said the contribution of higher profit margins to inflation “moderated” in the first half of this year, “suggesting that the rising wage pressures are starting to be absorbed by firms”.

Melanie Debono, an economist at research group Pantheon Macroeconomics, said: “We continue to expect services inflation to ease enough over the coming months to convince the ECB to not hike [interest rates] further.” 

Hiring activity at eurozone companies picked up slightly this month, but was still the second-slowest rate over the past 32 months. Job creation slowed as “spare capacity and reduced confidence in the outlook meant that companies were again cautious in their approach to hiring”, S&P said.

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