PMI Index: Inflation slows the growth of the services sector in Spain in June | Economy

Workers in a cafeteria in Madrid.
Workers in a cafeteria in Madrid.JOHN BARBOSA

The pressure of rising prices continues to be a problem for the recovery of the Spanish economy. Improving business activities support growth, although high inflation is taking a toll on business and household budgets. The PMI Commercial Activity Index, prepared by the firm IHS Markit and released this Tuesday, stood at 54 points in June. By decreasing 2.5 points with respect to the previous month, the evolution of the indicator marks the slowest expansion since last March. The uncertainty regarding the macroeconomic situation, fueled by the publication of the PMIs, has weakened the European stock markets, which have turned red in the mid-session.

The index, a reliable thermometer to anticipate changes in economic cycles, is prepared through a survey of the purchasing managers of 350 Spanish service companies, who must rate the evolution of their activity with respect to the previous month from 0 to 100 . A reading above 50 points reflects an increase in sales, while if it is placed below it means a contraction.

Faced with the acceleration of inflation —which in June ran amok to 10.2%, the highest level in 37 years—, companies were forced to pass on the increase in their costs to customers through an increase in rates. The rise in prices in general continues to worry service companies, who consider the persistent inflation as a potential drag on their activity at least until the end of the year, since the management of household expenses is subject to a major pressure.

In fact, some companies indicated that the purchasing power of customers is deteriorating, raising concerns that activity growth will weaken in the coming months. “Given that the price rise is likely to persist at least in the short term, demand is expected to be negatively affected,” warns the director of S&P Global Economics, Paul Smith.

Similarly, the manufacturing sector slowed its expansion in June, registering a marginal drop in orders compared to the previous month. Companies indicated that energy continues to be one of the main causes of the increase in operating costs, although the price of raw materials has also picked up. The slowdown in both manufacturing and services was reflected in the Composite Index of Total Activity in Spain, which in June fell to 53.6 points from the 55.7 registered in May. Likewise, confidence about the future reached its lowest level in the last three months, as concerns regarding inflation intensified. However, companies returned to hiring more staff, in response to the increase in backorders.

Eurozone growth slows

The slowdown was widespread in the rest of the euro zone economies, especially in Ireland and France, where the rates of increase in total activity slowed down sharply to their lowest levels in 16 and 14 months, respectively. The Total Activity Composite Index for the euro zone stood at 52 points in June, compared to 54.8 in May.

According to Chris Williamson, chief economist at IHS Markit, the sharp deterioration in the pace of growth of business activity in the euro zone increases the risk that the region will fall into economic decline in the third quarter. “The manufacturing sector is already contracting for the first time in two years, and the service sector has suffered a marked loss of growth momentum amid the cost of living crisis,” he added. Although job creation remained solid, the reduction in the pace of growth in demand and the deterioration of business optimism suggest that the labor market will also decline in the coming months, experts from the consultancy warn.

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