GLOBAL ECONOMY-Global slowdown fears darken as cost of living bites

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(Corrects to show British growth rate slowing to a 17-month low, not an 11-month low, in paragraph 2)

* PMIs suggest global economy heading into serious slowdown

* Euro zone business activity shrinks in July

* China lockdowns, Ukraine crisis further disrupt supply chains

By Jonathan Cable and Leika Kihara

LONDON/TOKYO, July 22 (Reuters) – The global economy looks increasingly likely to be heading into a serious slowdown, just as central banks aggressively reverse ultra-loose monetary policy adopted during the pandemic to support growth, data showed on Friday.

In the euro zone, business activity contracted this month for the first time in well over a year while in Britain growth was at an 17-month low, purchasing managers’ surveys said on Friday.

Sister surveys due later from the United States are expected to show a slowdown in the world’s largest economy, while Japan’s government is expected to sharply cut its growth forecast for domestic growth.

Meanwhile, China’s strict COVID-19 lockdowns and Russia’s invasion of Ukraine have further damaged global supply chains that had not yet recovered from the pandemic.

“We’ve had a massive increase in global energy and food prices and that is hitting consumers’ disposable income and forcing them to cut back,” said Samuel Tombs at Pantheon Macroeconomics.

“It is quite a gradual deceleration however and we’re not hurtling into a recession.”

Euro zone business activity unexpectedly contracted this month due to an accelerating downturn in manufacturing and a near-stalling of service sector growth as burgeoning costs pushed consumers to cut back on expenditure, a survey showed.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI), seen as a good gauge of overall economic health, fell to 49.4 in July from 52.0 in June, well below all forecasts in a Reuters poll that had predicted a more modest dip to 51.0.

A reading below 50 indicates a contraction and July’s preliminary estimate was the lowest since February 2021.

Businesses across the euro zone continued to report mounting inflation pressures and an acceleration in wage growth, even as the overall growth outlook becomes increasingly murky, the European Central Bank said on Friday, based on a survey of 71 major firms.

Inflation in the currency union was 8.6% last month, official data showed, and on Thursday the ECB raised interest rates by more than expected, confirming that concerns about runaway inflation now trump growth considerations.

The U.S. Federal Reserve, battling 40-year high inflation, is forecast to deliver another hefty 75 basis point interest rate hike at its meeting next week.

The Reuters poll gave median predictions of a 40% probability of a U.S. recession over the coming year and a 50% chance of one happening within two years, a significant upgrade from a June survey.

China and Japan remain exceptions by keeping monetary policy loose, a sign their economies – the second- and third-largest in the world – lack strength to offset the weaknesses in other parts of the globe.

CHINA SLOWDOWN

Worries over a global slowdown are casting a shadow over Asia’s recovery prospects with factory activity growth slowing in Japan and Australia, keeping pressure on policymakers to support their economies while tightening monetary policy to combat inflation.

Japan’s manufacturing activity grew at the slowest pace in 10 months in July, its PMI survey showed on Friday, boding ill for an economy struggling to shake the wounds from the pandemic.

“July’s PMIs suggest that the manufacturing sector is slowing as demand weakens, while the latest COVID-19 is starting to hit the services sector,” Marcel Thieliant, senior Japan economist at Capital Economics, said on Japan’s PMI.

Factory activity also slowed in Australia with the index falling to 55.7 in July from 56.2 in June, a separate survey showed on Friday.

China’s economic growth slowed sharply in the second quarter, weighed by widespread COVID lockdowns and pointing to persistent pressure over coming months from a darkening global outlook.

The slowdown in the world’s second-largest economy, as well as the fallout from aggressive central bank tightening, forced the Asian Development Bank to slash its growth forecast for the region on Thursday. (Reporting by Jonathan Cable and Leika Kihara; Editing by Sam Holmes and Susan Fenton)