The feared slowdown that was going to occur in the second half of the year in the European and Spanish economy is beginning to show the first signs of appearance. This Monday, the PMI indices of the old continent confirmed that industry this month experienced the biggest contraction in the last three years, while the service sector, which is holding on to expansionary ground, is beginning to weaken due to the wave of inflation and the tightening of monetary policy.

Germany and France are the countries for which there are the first alerts, although S&P warns that the slowdown in the rest of the continent is evident. Total Eurozone business activity fell at the strongest pace in eight months in July, marking weakness at the start of the third quarter.. A deterioration in forward-looking indicators, such as expectations regarding future activity and the volumes of new orders received, also suggests the possibility that the economic slowdown will intensify in the coming months, prompting companies to backtrack on hiring,” the company warned.

The PMI indices prepared by Standard & Poor's set the difference between growth and contraction in any economic sector at 50 points. In July, the Eurozone manufacturing sector index stood at 42.9 points, its lowest in the last 38 months, that is, in more than three years; while that of the services sector stood at 51.1 points, the lowest level in the last six months. The combination of both left the total activity index at 48.9 points, in alert territory.

European companies have verified this month that demand has suffered in a general way and new orders have fallen at an increasing rate, which indicates that they will try to reduce their activity even more in the coming months. “The worsening of the loss of new orders in the industrial sector, where one of the most intense declines since 2009 has been recorded, was accompanied by the first drop in new orders received in the services sector in the last seven months,” they explained.

For this reason, the industrial sector has destroyed employment for the second consecutive month. In Spain, the affiliation data for July is not yet known, but it has emerged that different companies in the sector have had to resort to Temporary Employment Regulation Files (ERTE) due to the stoppage of activity, such as the Galician boilermaker Citic Censa -which is considering an ERTE for 60 workers for at least six months-, Tubos Reunidos -which has announced an ERTE for the staff of the Amurrio plant in Álava-, or ArcelorMittal , which declared a six-month ERTE for 7,000 employees in April.

In services there has been a growth in the workforce, but “the lowest in five months” and the rate of job creation has slowed sharply compared to the historically high rates registered in the second quarter.

recession alert

Given this scenario, the experts from the British consultancy Capital Economics warn that “the economy will continue in recession”, but even so “the labor market will remain stressed, with high wage growth and strong core inflation”, which will encourage Christine Lagarde, president of the ECB, to continue raising interest rates this Thursday.

“Eurozone PMI suggests a contraction in economic activity at the start of the third quarter. In general, this is in line with a weakening trend in survey indicators in recent months and increases the risk of recession for the bloc (…) The risk of recession has increased. With expectations that production will weaken further, the outlook for the coming months is, at best, one of slowdown,” the ING experts point out.

Germany has suffered the most intense fall in industrial production since 2009 in the month -excluding the months of confinement due to the pandemic-, while the growth of the service sector suffered an “intense deceleration”, something similar to what happened in France, which registered a “particularly intense deceleration of total activity”.. “The rest of the region as a whole eked out very modest growth for the second month in a row, marking the weakest result so far this year and reflecting a sharpening slowdown in the manufacturing sector and weaker growth in demand for services.”

S&P believes that this downward trajectory that the Eurozone economy has begun will continue in the coming months, “as the service sector continues to lose momentum”, and as “the PMI new orders index and the service sector backlog index have fallen into contraction territory for the first time since the end of last year. These trends are especially pronounced in the manufacturing sector, suggesting that their decline is likely to continue as the second half of 2023 progresses.”