Euro zone business growth slumped in June as price hikes bite

LONDON (Reuters) – Euro zone business growth has slowed significantly this month – and by much more than expected – as consumers concerned about soaring bills opted to stay at home and defer purchases to save money, a survey showed on Thursday.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI), seen as a good gauge of overall economic health, slumped to 51.9 in June from 54.8 in May, far below the 54.0 predicted in a Reuters poll and its lowest level since February 2021.

“Euro zone economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost of living shock and slumping business and consumer confidence,” said Chris Williamson, chief business economist at S&P Global.

The composite new business index dropped to a 16-month low of 50.0, the dividing line between growth and contraction, from 53.3.

A PMI covering the bloc’s dominant services industry sank to 52.8 from 56.1, missing expectations for 55.5 and its weakest reading since April 2021.

Growth in demand for services all but dried up and firms faced input costs rising at a near record rate, forcing them to pass some of that burden on to customers. The input prices index rose to 78.3 from 77.4 and has only been higher twice in the survey’s 24-year history – in March and April.

Inflation in the bloc hit a record 8.1% last month and could still go higher in coming months so the European Central Bank is expected to raise its deposit rate above zero for the first time in a decade in September, a Reuters poll found.[ECILT/EU]

High prices meant demand for manufactured goods fell at the fastest rate since May 2020, when the coronavirus pandemic was taking hold, and the headline factory PMI fell to a near two-year low of 52.0 from 54.6. The Reuters poll had predicted a modest drop to 53.9.

An index measuring output, which feeds into the composite PMI, dropped to 49.3 from 51.3, its first time sub-50 in two years.

“Inflows of new business have stalled, led by a slump in demand for goods and reduced demand for services from cash-strapped consumers in particular,” Williamson said.

“At the same time, business confidence has fallen sharply to a level rarely seen prior to the pandemic since the region’s economic contraction during the 2012, hinting at an imminent downturn unless demand revives.”

With costs still soaring and supply chains disrupted factories cut back on purchases of raw materials and suggesting there would be little improvement anytime soon optimism waned. The future output index sank to 51.6 from 55.4, the lowest since May 2020.

(Reporting by Jonathan Cable; Editing by Hugh Lawson)