Manufacturing in Europe’s industrial heartland weakened further in July, confirming the worst fears of EU leaders concerned by the direction that the bloc’s economy is taking.

S&P Global said today its eurozone manufacturing purchasing managers index (PMI), a rough real-time proxy for activity in the sector, fell this month, as the sector dived deeper into contraction in both Germany and France.

The eurozone manufacturing PMI fell to 45.6, a seven-month low, from 45.8, disappointing expectations for a modest increase to 46.0. In Germany the indicator came in at 42.6, a three-month low, while in France it fell for a second straight month to 44.1. Anything under 50 is contractionary territory.

The composite PMI, which includes services, stayed just above 50, despite slowing from June.

“This looks like a serious problem,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank in a comment accompanying the data release.

“Germany’s economy fell back into contraction territory, dragged down by a steep and dramatic fall in manufacturing output. The hope that this sector could benefit from a better global economic climate is vanishing into thin air,” he added.

European industry — and Germany first and foremost — was battered by the surge in energy prices following Russia's invasion of Ukraine. The bloc rode out the immediate emergency better than expected, finding alternatives to Russian gas, for example, through imports of U.S. liquefied natural gas.

But the hope that European industry would swiftly recover has faded, even as the eurozone economy in the aggregate returns to growth.

Eurostat's industrial production index for the eurozone remains below its 2021 level, and is trending lower. And policymakers are starting to realize that the turnaround they had expected is not materializing.

“The economic development of the euro area rests increasingly on services,” Bank of Finland Governor Oli Rehn wrote in a blog post on Friday. “The situation of industry, on the other hand, is gloomy, and there is no sign of a pick-up.” He added that it was time to consider whether the current slump in manufacturing is not “as temporary and cyclical in nature as has been assumed.”

The numbers underline the challenge of maintaining Europe’s competitiveness — and relevance — as China and the U.S. race to reshape the global economy within the context of an increasingly acute geopolitical rivalry.

The newly re-elected chief of the European Commission, Ursula von der Leyen, put restoring competitiveness front and center in her political priorities for her next mandate, while European Central Bank President Christine Lagarde said last week that Europe’s competitive position vis-à-vis China is set to have a growing influence on the Bank’s thinking.

A long-awaited report by former ECB president Mario Draghi, now due in September, is expected to provide more detail, and help set the economic agenda for the Berlaymont for the years to come. In a recent speech in Spain, Draghi underscored the importance of cheaper energy as a driver of economic growth but also appeared to allow greater scope for state-driven investment and trade protection measures.