A new preliminary survey showed that in August, German business activity contracted at the fastest pace in over three years.

S&P Global released its HCOB German Flash Composite Purchasing Managers’ Index (PMI), which dropped to 44.7 from July’s reading of 48.5, reaching its lowest level since May of 2020, and grossly missing analyst expectations of 48.3.

It was the second consecutive month the index missed the 50-level which separates growth from contraction.

The composite PMI index tracks the over two-thirds of the German economy made up of the services and manufacturing sectors. The growing contraction in manufacturing output was enhanced by a renewed downturn in services activity.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank said, “Any hope that the service sector might rescue the German economy has evaporated. Instead, the service sector is about to join the recession in manufacturing, which looks to have started in the second quarter.”

For the first time in eight months, business activity in the services sector contracted, with the index’s reading falling from 52.3 to 47.3, the lowest reading seen in nine months.

The survey also showed that while the manufacturing PMI rose from July’s 38.8 to August’s 39.1 the reading still remained indicative of a deep contraction.

Business sentiment remained pessimistic as rising interest rates, customer uncertainty and high inflation all worked together to constrain demand for goods and services, according to the survey.

It found an increase in inflationary pressures which was being caused by accelerated cost and price hikes in the services sector.

de la Rubia said, “Services companies seem to feel surprisingly bold jacking up prices at an even quicker rate.”