Eurozone Economy Seen Contracting as ECB Raises Borrowing Costs

“The eurozone 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 Data firm S&P Global, which compiles the survey.

The data underlines the magnitude of the challenge facing the ECB as it begins to tighten monetary policy to combat accelerating inflation. Higher rates will raise the cost of borrowing to replace maturing bonds for some of the eurozone’s most indebted members. This is forcing the bank into a delicate balancing act and could test the cohesion of the bloc in the coming months, especially in a context of slowing or negative growth.

S&P Global said its composite Purchasing Managers Index for the eurozone—which measures activity in both the manufacturing and services sectors—fell to 49.4 in July from 52.0 in June, reaching its lowest point in 17 months. A reading below 50.0 indicates a decline in activity. Economists surveyed by The Wall Street Journal last week had expected the

PMI

to stay above that threshold.

Mr. Williamson said the outlook for factories is particularly gloomy, with businesses reporting “an unprecedented rise in unsold stock” as demand has proved much weaker than they had expected.

The eurozone economy has been hit hard by the fallout from Russia’s February invasion of Ukraine, as sharply higher energy and food prices have weakened household spending power and threatened business profit margins. Household and business confidence has also been hit hard by the largest military conflict on the continent for almost eight decades.