LONDON, July 24 Reuters Euro zone business activity shrank much more than expected in July as demand in the bloc39;s dominant services industry declined while factory output fell at the fastest pace since COVID19 first took hold, a survey showed.

The decline was broadbased with the euro zone39;s two biggest economies Germany and France both in contractionary territory and will likely add to fears the bloc will slip back into recession.

The survey also indicated the European Central Bank39;s sustained campaign of interest rate rises is starting to take its toll on consumers and denting the services sector.

This will pose questions for the bank, which meets on Thursday, as it weighs its fight against record inflation against the economic damage it could cause.

HCOB39;s flash Composite Purchasing Managers39; Index PMI for the euro area, compiled by SP Global and seen as a good gauge of overall economic health, dropped to an eightmonth low of 48.9 in July from June39;s 49.9.

That was below the 50 mark separating growth from contraction and lower than all expectations in a Reuters poll which had predicted a modest dip to 49.7.

The weakness was widespread across all sectors, but it was the manufacturing sector that posted another bad reading, said Paolo Grignani at Oxford Economics.

Today39;s print confirms the deterioration in macroeconomic conditions is well underway and spreading from manufacturing to other sectors. In our baseline case we expect subdued growth for…