By Scott Kanowsky
Investing.com -- A slowdown in euro zone business activity moderated for a second straight month in December as supply conditions improved and price pressures showed signs of easing, according to a key gauge of conditions for the currency bloc's manufacturing and services sectors on Friday.
S&P Global's flash euro zone composite purchasing managers' index rose slightly to 48.8 during the month, up from 47.8 in November. Economists had predicted the reading would increase to 48.0.
It is the highest level since August, but the sixth consecutive month that the figure has come in below the 50 mark that separates growth from contraction.
The region's manufacturing sector saw its seventh straight monthly drop in factory output, although the rate of decline in production and new orders eased.
Service industry output also slipped, albeit at a lessened pace. The index for the sector inched up to a four-month high of 49.1, which S&P Global said was indicative of "only a modest" monthly deterioration in activity.
On a country-by-country basis, Germany - the euro zone's largest economy - saw the rate of decline in business activity slacken across both manufacturing and services, thanks in part to improving supply chains and reduced fears over energy constraints. But a decrease in output in France quickened, as a softening of a downturn in manufacturing was offset by the steepest fall in activity in its key service sector in 22 months.
S&P Global noted that overall business sentiment remains subdued by historical standards mainly due to a "challenging environment" caused by high living costs, elevated interest rates, energy concerns, and the war in Ukraine.
In the fourth quarter as a whole, business activity was worse than the previous three-month timeframe, with the average quarterly PMI indicating the sharpest economic slide since 2013 if excluding periods impacted by pandemic lockdowns.
In a statement, S&P Global chief business economist Chris Williamson said the December PMI print signals a "strong possibility of recession" in the euro zone. But he added that the survey hints that any potential decline will be "milder" than previously thought a few months ago.
Williamson pointed in particular to the outlook for inflation, which he described as "encouraging" despite signs that it is likely a symptom of weakening demand. Inflation in the euro zone fell to 10.0% in November - the first decline in 17 months.
"Supply chains [are] now improving for the first time since the pandemic began and firms’ costs [are] growing at a sharply reduced rate, feeding through to lower rates of increase," he said.
Analysts at ING said in a note that the data will likely prove difficult to interpret for the European Central Bank, which raised interest rates by 50 basis points on Thursday and warned of more hikes to come as it seeks to bring down soaring price growth.
"While the downturn seems to be easing according to the survey, we also see that inflationary pressures continue to cool. For the doves on the governing council, the latter will likely fuel concern that the ECB could end up doing too much," the ING analysts said.