Falling eurozone business activity raises doubts over ECB’s next move
Falling eurozone business activity raises doubts over ECB’s next move

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Euro zone businesses were hit by a sharp drop in output and new orders, a closely watched survey showed, raising doubts about whether the European Central Bank will raise interest rates next month.

The Eurozone HCOB Composite Purchasing Managers’ Index (a measure of corporate activity in the 20-country bloc) fell to a 33-month low of 47 after a sudden contraction in services sector activity in August and a sustained decline in manufacturing.

The index fell from 48.6 in the previous month, slipping further below the 50 contraction-expansion mark and fueling fears of an economic slowdown in the second half of the year.

The preliminary reading was well below the modest drop to 48.5 that economists polled by Reuters had forecast.

PMI line chart shows euro zone business downturn deepening

Investors’ bets on a grim economic outlook make it less likely that the European Central Bank will raise interest rates again at its meeting next month. The euro fell 0.3% to $1.108, while Germany’s rate-sensitive two-year bond yield fell 6.8 basis points to 3%.

The survey also found that businesses reported a reversal in the recent downward trend in inflationary pressures. Average prices charged by companies for goods and services accelerated for the first time in seven months, pushing prices back above their long-term average.

Input costs continued to fall for manufacturers, but the survey found that costs for service firms “increased slightly” due to higher wages and fuel prices.

“The continued sharp decline in PMI data will test the ECB’s growth optimism,” said Mark Wall, chief European economist at Deutsche Bank. “We expect the ECB to pause in September, but it is unclear whether inflation is what the ECB wants. The pause should not be misinterpreted as a peak.”

Euro zone PMI readings fell to their lowest level since November 2020, reflecting a sharp decline in the services sector, where activity contracted for the first time since December. This has exacerbated the ongoing (though less severe) contraction in manufacturing.

Cyrus de la Rubia, chief economist at Commerzbank, said: “Unfortunately, the services sector in the euro area is showing signs of decline, matching the poor performance of manufacturing. ”

Overall new business inflows fell for the third straight month (excluding the pandemic), at the fastest pace since 2012, prompting continued layoffs at manufacturers and a slowdown in hiring in the larger services sector.

German business activity suffered its worst slump in more than three years, with the country’s PMI reading falling to its lowest in 38 months after a drop in new orders, lower business output and shrinking inventories took their toll in August.

France’s PMI score remained deep in contraction territory at 46.6 as activity in the country’s services sector fell to a 30-month low and manufacturers continued to report sharp declines, albeit at a slightly lower rate than in July.

Andrew Kenningham, an economist at consultancy Capital Economics, said the decline in services sector activity suggested that “the rebound in tourism and hospitality is fading away”. He added: “There are good reasons to expect the eurozone economy to slip into recession in the second half of the year, with Germany likely to be the worst performer”.

UK economic activity also fell more than expected in August, according to the S&P Global/Cips Flash UK Composite Output Index, which fell below the neutral 50 threshold for the first time since January to 47.9 in August from 50.8 in July.

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