Spain's Services Sector Contracted Sharply Again In July

The euro zone's services sector slid further into contraction in July, hitting a five-year low, while inflationary price pressures remained near record levels. Final data in the monthly PMI survey of private sector companies showed that of the big four economies in the euro zone, only in Germany did services activity expand, and in this case slightly more quickly than in June. The RBS/Markit Eurozone Purchasing Managers Index for services companies, which range from banks to cafes, fell to 48.3 in July from 49.1, unrevised from the flash estimate and well below the 50.0 mark that separates growth from contraction.


In among the details there is perhaps some faint comfort for Spain, since the rate of contraction was - at 37.1 - slightly slower than last months 36.7 reading, but that is, as I say, faint comfort, since the rate of contraction is still very strong, and we are contracting over an already greatly weakened June reading, so make of that what you will. The year on year rates now being clocked up must be real shockers if the PMIs are any indication of what is happening at this point.




Companies were particularly pessimistic about the employment situation as they continued to lay-off rising numbers of workers during what has already become a very severe economic slowdown.

"The PMI data for July indicated no improvement at the start of the third quarter as they pointed to a substantial fall in service activity and a record contraction of employment," said Nathan Carroll, economist at Markit. "Furthermore, firms were not expecting an improvement in the near future with sentiment at a survey low."

The Markit employment index - which has now fallen in every month since March 2008 - dropped to 42.6, with hotels and restaurants worst hit. The job creation rate was the lowest in the survey's nine-year history.

Spain's change in the economic cycle has coincided with global credit restrictions and soaring fuel prices, causing a far steeper than expected slowdown and raising risks of recession by early 2009.

The survey found business expectations fell to a record low of 46.1 in July.
It was only the second time companies surveyed have expressed pessimism about business conditions in Spain.

Costs rose to 65.3, marking the highest level since October 2000, after Spanish inflation hit a 13-year high in July. Some companies said staff salaries had risen since June and rising fuel and oil costs were also hitting their margins.