Referenews

Services activity is also softening, and U.S. businesses in that sector are also seeing a modest easing of inflation.

Abating price pressures come as the Federal Reserve and other global central banks raise interest rates to combat inflation that threatens global growth. Officials in the U.S.—the world’s largest economy—have increased rates at the fastest pace since the 1980s to cool the economy and bring down inflation, which is running near a 40-year high.

High inflation, soaring energy prices and rising borrowing costs have tested economies across the globe during the rebound from the Covid-19 pandemic.

“We got the steepest downturn we’ve seen since the global financial crisis, if the initial lockdown period is excluded,” said Chris Williamson, chief economist at S&P Global. “The good news is that this downturn in the economy is alleviating inflationary pressures.”

U.S. business activity further declined in December, surveys by S&P Global showed, while European business activity declined less sharply in December than the prior month. Both regions reported moderating price pressures.

“There is little doubt that we are seeing some cooling in inflation,” said

Joshua Shapiro,

chief U.S. economist at MFR Inc. “The Fed wants inflation at 2%. We are still a far cry from that.”

U.S. consumer inflation was 7.1% in November from a year earlier, down from a 9.1% peak in June.

Two big uncertainties surround the outlook for next year: how much further central banks will raise their key interest rates to tame inflation, and how China’s economy will perform as Covid-19 controls are relaxed. Slowing global demand has emerged as an issue in Asia, with industrial powerhouses reporting falls in exports during November.

S&P Global’s composite output index for the U.S. declined to 44.6, a four-month low, from 46.4 in November. The index, which measures activity in services and manufacturing, remained below 50, indicating a contraction.

The Fed this week forecast U.S. growth of just 0.5% this year and next year, sharply slower than in 2021 as the economy rebounded from the pandemic.

Europe’s economy likely contracted at the end of 2022, but showed signs of resilience that suggested the downturn could be milder than feared just a few months ago.

S&P Global’s composite output index for the eurozone remained below the 50 mark in December but rose by one point to 48.8 from November, pointing to a smaller fall in activity than expected earlier.

The survey results are consistent with the latest economists’ expectations about how Russia’s war in Ukraine could affect Europe’s economy next year.

Analysts have raised economic outlooks for Europe, with a few even expecting Germany—Europe’s largest economy and one of the worst hit by the energy-price explosion—to post growth next year.

Positive factors include progress made by European governments in securing non-Russian supplies of natural gas, new government subsidies to help businesses and households absorb higher prices, and robust employment.

Business surveys have pointed to a significant slowdown in the global economy for many months, but that is only now showing up clearly in the economic data collected by governments.

U.S. retail spending and manufacturing weakened in November, both signs of a slowing economy. The labor market has also slowly cooled from earlier in the year, though it remains historically tight due to a limited pool of workers that has caused elevated wage gains.

In the eurozone, retail sales tumbled in October as the cost of heating homes jumped with the arrival of colder weather. And in the U.K., retail sales fell by 0.4% in November, to a level that was lower than before the pandemic.

Asian economies, meanwhile, offered signs that the chance of a steep downturn was receding in some parts of the world.

A survey for Japan suggested that economic activity stopped falling in December. China has relaxed its strict pandemic protocols with officials putting renewed emphasis on economic growth next year, though it isn’t clear how the changes could affect the second largest economy in the world.

Some economists say a surge in Covid infections could significantly weaken Chinese output in the early months of next year, followed by a strong rebound starting in the second quarter.

“Fear of quarantine has now given way to fear of infection, and the economic outcome is even worse,” said Mark Williams, chief Asia economist at Capital Economics. “We now expect sharp falls in activity this quarter and next.”

Higher interest rates are expected to restrain any potential global rebound in the global economy as 2023 advances.

“Policy makers, at least in the U.S. and Europe, now appear resigned to weaker economic growth in 2023,” said Christian Nolting, chief investment officer at Deutsche Bank’s private bank. “Any recessions are likely to be short-lived, but they will not be painless.”

Write to Austen Hufford at austen.hufford@wsj.com and Paul Hannon at paul.hannon@wsj.com