By Jonathan Cable
LONDON (Reuters) -The drop in euro zone business activity deepened last month, a survey showed, probably extinguishing any hope the currency union would avoid recession just as elevated inflation puts pressure on the European Central Bank to act.
Businesses and consumers are wary of spending as the region heads into the winter months with already high energy prices likely to climb further, while firms are also suffering from supply chains disrupted by Russia's invasion of Ukraine.
S&P Global's final composite Purchasing Managers' Index (PMI) for the euro zone, seen as a good gauge of economic health, fell to a 20-month low of 48.1 in September from August's 48.9. Anything below 50 indicates contraction.
"The final euro zone PMIs for September suggested that price pressures in the region are not yet starting to ease, even as activity appears to be in decline," said Jessica Hinds at Capital Economics.
"We think some economies, including Germany, are already contracting and expect the euro zone as a whole to fall into recession in Q4."
Services activity weakened in Germany, Italy and Spain, although in France while growth was weaker than a preliminary estimate it was faster than in August.
In Britain, outside the European Union, businesses last month suffered the sharpest contraction in activity since early last year.
There is a 60% chance of a euro zone recession within a year, a Reuters poll found last month, while another poll found there was a 75% chance of one in Britain.
PRICE RISES INTENSIFY
Reversing a downward trend, both the composite input and output prices indexes rose sharply, indicating sustained and widespread inflationary pressure.
In Germany, Europe's largest economy, an increasing number of companies are planning to raise their prices, the Ifo economic institute said earlier on Wednesday, adding this probably meant inflation was not about to cool.
Prices are rising much faster across the region than the ECB would like. Alongside a decline in activity, this leaves the central bank walking a tightrope as it tries to curtail inflation while also supporting growth.
Last month the ECB raised its key interest rates by an unprecedented 75 basis points and promised further hikes, prioritising the fight against inflation even as the bloc heads towards a winter recession and gas rationing.
Policymakers voiced more support last week for another big interest rate hike after inflation in the euro zone hit a record high 10.0% in September, five times the Bank's target.
Rising prices, particularly energy costs, alongside a gloomy economic outlook means consumers are keeping their hands in their pockets and cutting discretionary spending.
The PMI for the bloc's dominant services industry sank to 48.8 last month from 49.8, its lowest since February 2021.
Wednesday's data comes after a sister survey on Monday showed manufacturing activity across the euro zone declined further last month as a growing cost of living crisis hurt demand while soaring energy bills limited production. [EUR/PMIM]
A combination of those downbeat factors meant optimism fell sharply. The services business expectations index fell to its lowest since May 2020 when the coronavirus pandemic was cementing its grip on the world.
"Looking ahead, the forward-looking components of the PMIs are painting a gloomy picture," added Hinds.
(Reporting by Jonathan Cable; Editing by Susan Fenton and Toby Chopra)