Adding to recession risks, the euro area manufacturing sector contracted in July as production logged the sharpest fall since the initial wave of the COVID-19 lockdowns in early 2020, final data from S&P Global showed on Monday.

The final manufacturing Purchasing Managers' Index fell to a 25-month low of 49.8 in July from 52.1 in June. The flash reading was 49.6.

A score below 50.0 indicates contraction. The reading signaled the first deterioration in manufacturing conditions for just over two years. Manufacturing output declined at the sharpest since the early stages of the pandemic in May 2020. Another major drag on output was demand, with new orders falling sharply.

The survey showed that there was a stronger stockpiling at the start of the third quarter, with both pre- and post-production inventory levels rising at faster rates.

Purchasing activity was subsequently reduced, marking the first fall in input buying in just under two years. At the same time, delivery times lengthened to the least marked extent since October 2020.

Employment increased at the softest pace in almost a year-and-a-half in July.

Manufacturers turned pessimistic in their assessment towards growth prospects over the coming year. High inflation, the war in Ukraine, future energy supplies and recession fears were cited by firms as reasons for the negative outlook. Eurozone manufacturing is sinking into an increasingly steep downturn, adding to the region's recession risk, Chris Williamson, chief business economist at S&P Global Market Intelligence said.

The energy crisis adds to the risks that not only will weaker demand and destocking cause manufacturing production to decline at an increased rate in the coming months, but reduced energy supply will act as an additional drag on the sector, Williamson added.

Germany, France, Italy and Spain all recorded sub-50.0 readings in their respective headline manufacturing PMIs in July.

Germany S&P Global/BME final manufacturing PMI registered 49.3 in July, down from 52.0 a month ago but slightly above the flash 49.2. The sector shrank for the first time since June 2020. The principal drag on the performance came from a deep fall in new orders.

At the same time, the French manufacturing sector downturn worsened in July as both output and new orders declined at their greatest extents since the initial wave of COVID-19 disruption took place in the first half of 2020. The final factory PMI dipped to 49.5 from 51.4 in June. The flash reading was 49.6.

Italy's manufacturing activity also fell into the contraction territory for the first time since June 2020. The PMI slid to 48.5 in July from 50.9 in June. There were renewed decline in production as well as orders.

The contraction in Spain's factory sector was the first in more than a year. The index posted 48.7, down from 52.6 in June and hit its lowest level since May 2020.

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