Eurozone hit by toxic mix of price rises and stagnation

The European economy is heading for a sharp slowdown and a "toxic" mix of stagnating output and high inflation.

The Purchasing Managers Index (PMI) survey of industry and the service sector across continental Europe and the key German Ifo index of business sentiment were released yesterday and are showing their gloomiest results in years. They will unsettle the European Central Bank as it consider its next move on interest rates, but economists remain convinced that the ECB will raise rates by a quarter percentage point at its next meeting in a fortnight. The euro fell on the news.

The euro area "flash" PMI data for June came in weaker than expected for both the manufacturing and services sectors. If these estimates are confirmed in the final readings published next month, this month will be the first time both headline balances have simultaneously recorded sub-50 readings since June 2003 – meaning that the eurozone economy is contracting and heading for recession. France has now followed Italy and Spain into contraction, and the relatively strong German economy is not sufficient to outweigh such weakness at the supranational level.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 German executives, declined to 101.3 from 103.5, the lowest since January 2006.

Howard Archer, economist at Global Insight, said: "The surveys make very worrying reading, showing a toxic cocktail of essentially stagnant economic activity but elevated and still rising inflation. This heightens concern about the current state of the eurozone economy and its prospects. Despite contracting activity and demand in June, output prices picked up for a fourth month running to be at their highest level for 17 months."