Tourism is expected to drop quickly. | Majorca Daily Bulletin reporter

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Activity in Spain's services sector expanded in August at the slowest rate since January, with companies concerned that inflation will weigh on their profits and on customers' demand, a survey showed today and a growing number of hotels and restaurants may decide to close in the Balearics this winter because of rising operating costs and slowing demand.

S&P Global's Purchasing Managers' Index (PMI) of services companies, which account for around half of Spain's economic output, fell to 50.6 last month from 53.8 in July, close to the 50.0 mark that dividing growth from contraction.

It was the lowest reading since January, when activity contracted with a reading of 46.6.

"Spain's economy headed towards stagnation during August as the service sector followed manufacturing by posting only marginal growth. High inflation and general market instability again dominated company reports on their current situation," wrote S&P Global Economics Director Paul Smith.

Service sector company managers are concerned high inflation will hurt demand from their customers, and the economy may be heading into a "challenging winter and possible recession", he added.

Spanish consumer price inflation slowed to 10.4% year-on-year in August from 10.8% in July - rates not seen since the 1980s.

A sister survey last Thursday showed Spanish factory activity contracted slightly in August as inflationary pressures and macroeconomic uncertainty weighed on demand.