By Scott Kanowsky

Investing.com -- Eurozone business activity slumped into contraction territory in July, dragged lower by a quickening slowdown in manufacturing and near-stagnant growth in services, according to a closely watched survey of companies of Friday.

S&P Global said its flash composite purchasing managers' index, which is used to measure the health of business activity, dropped to a 17-month low of 49.4. It is the first reading that has come in below the 50 mark - which indicates contraction - since February 2021.

Pressure from soaring prices softened slightly during the month but still ate into pent-up demand, following the lifting of pandemic-era restrictions, according to S&P Global.

Expectations for the year have also fallen to levels "rarely seen" over the past decade, S&P Global said, with businesses sweating over the confluence of energy supply fears and surging inflation. Firms are also eyeing the European Central Bank, which hiked interest rates by more than expected on Thursday in a bid to quell price increases across the Eurozone.

“With the ECB raising interest rates at a time when the demand environment is one that would normally see policy being loosened, higher borrowing costs will inevitably add to recession risks," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Adding to these concerns was a fall in German business activity for the first time this year in July, as inflation drove declines in both domestic and foreign demand.

S&P Global said its flash composite PMI reading for Europe's biggest economy sank to 48.0, down from 51.3 in June.

It is the lowest level in 25 months, and well below expectations of 50.1, as firms reported that high prices ate into their budgets. Performance was also hit by ongoing supply chain disruptions and uncertainty stemming from the war in Ukraine.
Activity in both Germany's manufacturing and services industries declined to 49.2. Economists had expected both sectors to remain in expansion territory, or above 50.

Expectations for the future also darkened to levels not seen since the height of first wave of the COVID pandemic, S&P Global said.

"[G]iven the noticeable falls in new business across both sectors, activity was somewhat prevented from experiencing a sharper fall thanks to the availability of previously secured contracts. With signs that this supportive prop is coming to an end, and warehouse inventories rising at a near-record rate in manufacturing, the outlook for output is turning increasingly negative,” said Paul Smith, economics director at S&P Global Market Intelligence.