European PMIs for August show steep decline

  • Excluding pandemic months, the latest numbers point to the lowest reading since April 2013.
  • The euro zone, the region of 20 countries that share a single currency, grew by 0.1% in the first quarter and 0.3% in the second quarter.
  • Analysts polled by Refinitiv said the European Central Bank would leave rates unchanged at its key rate of 3.75%.

An employee works on assembling a brake caliper for an electric vehicle in Duren, West Germany.

Ina Fassbender | Afp | Good pictures

European business activity contracted once again in August to the lowest level since November 2020.

The euro zone’s flash composite purchasing managers’ index, released on Wednesday, fell to 47.0 in August from 48.6 in July. That missed economists’ expectations for a figure of 48.8, according to Dow Jones.

A reading above 50 indicates an expansion of activity, while a reading below 50 indicates a contraction. Excluding pandemic months, the latest numbers point to the lowest reading since April 2013.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the euro zone’s services sector was “unfortunately showing signs of matching the poor performance of manufacturing”.

In terms of the breakdown between services and manufacturing, the former fell to a 30-month low of 48.3 and the manufacturing PMI rose slightly to 43.7 this month from 42.7 in July.

‚ÄúConsidering our GDP PMI figures [growth] Nowcast leads us to conclude that the Eurozone will contract by 0.2% in the third quarter,” Rubia added.

The euro zone, the region of 20 countries that share the single euro currency, grew by 0.1% in the first quarter and 0.3% in the second quarter. This sluggish growth reflects the impact of higher interest rates and energy prices as well as external demand.

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However, this masks sharp differences within the region. Germany, for example, announced a deep contraction in business activity in August.

“Downward pressure on the euro zone economy in August stems mainly from the German services sector, which switched from growth to contraction at an extraordinary pace,” Rubia said, adding to the argument that Germany is also turning low in manufacturing. “The Sick Man of Europe.”

The latest economic data is leading the debate on what the European Central Bank might do when it meets next month.

At its July meeting, ECB President Christine Lagarde said the central bank could raise or pause rate hikes. Ultimately, the decision depends on new data.

“We continue to expect services inflation to ease sufficiently in the coming months that the ECB may not hike last September,” Melanie Debono, senior European economist at Pantheon Macroeconomics, said in a note to clients. However, others disagree.

“Stagnant employment is combining with a fall in output, resulting in lower output per head. As a result, the ECB may be more reluctant to pause the hiking cycle in September,” Rubia said.

Analysts polled by Refinitiv suggest the central bank will keep rates unchanged next month at its key rate of 3.75%.

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