Business Activity across the eurozone contracted much more sharply than expected this month, a survey showed, as service sector output joined manufacturing in decline amid surging inflation and concerns over gas shortages.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI) for the euro area slumped to 47.0 in August from 48.9 in July. That was well below all forecasts in a Reuters poll that had predicted a milder drop to 48.5.

The disappointing figure signals a deepening downturn in the bloc and adds urgency for policy action to shore up the ailing economy. Both manufacturing and services are now shrinking as high prices weigh on demand and confidence.

The services PMI tumbled into contractionary territory for the first time this year, sinking to 48.2 from 51.2 in July on weak consumer spending. With households facing rising borrowing costs, demand fell sharply and firms cut prices despite elevated inflation.

There was some hopeful sign for factories as manufacturing output slipped at a slower pace after seven straight months of deep declines. The manufacturing PMI rose to 43.7 from 42.7, confounding expectations for another drop.

“Is a bottom in sight in manufacturing? Perhaps, as the headline index has increased despite still signalling shrinkage,” said economist Cyrus de la Rubia.

Firms also turned less pessimistic about the outlook, with the future factory output index improving. Nonetheless, overall private sector activity is declining at one of the sharpest rates in two years, the PMI figures highlight.

The downbeat data comes soon after the European Central Bank embarked on its most aggressive policy tightening path in July. But the ECB is expected to pause rate hikes next month as risks of recession rise.

“The service sector is, unfortunately, showing signs of turning down to match the poor performance of manufacturing,” said de la Rubia. “Indeed, service firms reported shrinking activity for the first time since end-2021.”

Until activity stabilises, pressure for more ECB stimulus measures may intensify in coming months given high inflation remains more than twice the bank’s 2% target.