Eurozone economy shrinks again, hit by inflation

European economic activity fell for a second straight month in August, a keenly-watched survey revealed Tuesday, as high inflation fuelled by Russia's war in Ukraine darkens the outlook.

The S&P Global Flash Eurozone PMI index dropped to its lowest level in 18 months as rising prices hurt demand for services and supplies to manufacturing.

The PMI fell from 49.9 in July to 49.2 in August. A reading below 50 represents a contraction in business activity.

The index dropped under 50 in July after 16 months of growth, as inflation driven by soaring energy prices and supply chain crises batters the world economy.

Manufacturing was already down last month but the downturn has now spread to services, including tourism, which had helped some EU economies hobble through the summer.

"Cost of living pressures mean that the recovery in the service sector following the lifting of pandemic restrictions has ebbed away," said Andrew Harker of S&P Global Market Intelligence.

"Declining output is now being seen across a range of sectors, from basic materials and auto firms through to tourism and real estate companies as economic weakness becomes more broad based in nature."

Harker said the survey showed that European manufacturers had built up record inventories of unsold finished goods, suggesting that production would not pick up "any time soon".

Employers are also rehiring staff shed during the COVID pandemic at a slower rate, he warned.

While high oil and gas prices linked to the war in Ukraine and sanctions imposed on Russia in response to its invasion remain high, within businesses inflationary pressures may have passed their peak.

However, "it appears that any alleviation to the inflation situation is coming too late to provide any real support to demand," Harker said.

"The remainder of 2022 is therefore looking to be one of struggle for firms across the eurozone."