Euro Zone Business Activity Declines More Than Expected, Inflationary Pressures Return
LONDON, Aug 23 (Reuters) – Euro zone business activity declined far more than anticipated in August, with Germany experiencing a particularly fast slide, while inflationary pressures made a comeback, according to surveys.
The latest purchasing managers’ indexes released on Wednesday pose a challenge for the European Central Bank (ECB), which aims to control rising prices without causing a recession.
A majority of economists polled by Reuters expect the ECB to pause interest rate hikes in September, despite elevated inflation. However, there is still a possibility of further rate increases by the end of the year, following the central bank’s aggressive policy tightening cycle.
“The continuing sharp drop in the PMI data will test the ECB’s growth optimism,” said Mark Wall, chief European economist at Deutsche Bank. “We are expecting the ECB to pause in September, but it is not clear that inflation is where the ECB wants it yet. A pause should not be misinterpreted as the peak.”
The services industry, which dominates the euro zone economy, experienced a decline for the first time this year, while manufacturing output continued to contract. However, there were some signs of a turnaround for factories.
The flash Composite Purchasing Managers’ Index (PMI) for the euro zone, compiled by S&P Global and considered a reliable indicator of overall economic health, dropped to 47.0 in August from July’s 48.6, its lowest level since November 2020.
This reading was well below the 50 mark that separates growth from contraction, and lower than all expectations in a Reuters poll, which had predicted a slight dip to 48.5.
A significant portion of the decline in activity was driven by firms completing old orders, with the backlogs of work index falling to its lowest level since June 2020, when the COVID-19 pandemic was taking hold globally.
In Germany, Europe’s largest economy, business activity contracted at the fastest pace in over three years, as a deepening downturn in manufacturing output was accompanied by a renewed contraction in services, according to an earlier survey.
Firms in Germany remained pessimistic about the outlook, as rising interest rates, customer uncertainty, and high inflation continued to weigh on demand.
In France, the dominant services sector contracted further, as falls in demand and new orders hinted at a contraction in the euro zone’s second-largest economy this quarter.
Meanwhile, Britain’s economy, which is outside the European Union, appears to be on track to shrink in the third quarter and faces the risk of falling into a recession. The country’s PMI showed a slump in factory output and broader weakness in the face of higher interest rates.
Following the release of Wednesday’s data, euro zone government bond yields and the euro tumbled, as traders speculated that the ECB may soon pause its interest-rate hiking campaign.
The euro zone services PMI sank, as indebted consumers feeling the pinch from rising borrowing costs reined in spending. Demand fell sharply, as prices rose faster than the ECB would prefer, deterring customers. The services output prices index remained elevated at 55.9, although it was the lowest since October 2021 and below July’s 56.1.
“Another weak PMI for the euro zone confirms a sluggish economy with recession as a downside risk. Inflation pressures for services remain stubborn as wage pressures continue to be a concern,” said Bert Colijn at ING. “The latter adds to our expectations that the ECB’s hiking cycle is not over yet.”
Official data showed that inflation was 5.3% in July, more than double the ECB’s 2% target but well below the readings seen late last year.
While manufacturing activity has been in decline since mid-2022, the latest PMI survey offered some hope that the worst may have passed. The headline index rose to 43.7 from 42.7, marking its first uptick in seven months and defying expectations in the Reuters poll for a dip to 42.6.
Optimism among factory purchasing managers also improved, suggesting that the worst may be over for manufacturers.
The ECB will closely monitor these developments as it navigates the delicate balance between controlling inflation and supporting economic growth.
Reporting by Jonathan Cable; Editing by Hugh Lawson and Toby Chopra
Our Standards: The Thomson Reuters Trust Principles.
How is the decline in the services industry and the contraction in business activity in Germany and France impacting the overall Euro zone economy
Euro zone business activity declined more than expected in August, particularly in Germany, while inflationary pressures returned, according to surveys. The latest purchasing managers’ indexes indicate a challenge for the European Central Bank (ECB), which aims to control rising prices without causing a recession. Many economists predict the ECB will pause interest rate hikes in September, despite elevated inflation. However, there remains the possibility of further rate increases by the end of the year. The services industry, which dominates the euro zone economy, declined for the first time this year, while manufacturing output continued to contract. Meanwhile, Germany’s business activity contracted at the fastest pace in over three years, accompanied by renewed contraction in services. In France, the services sector contracted further, suggesting a contraction in the euro zone’s second-largest economy this quarter.
The ECB will need to carefully navigate these challenges to support the Euro Zone’s economic recovery.