The euro zone economy has slowed sharply owing to weaker than forecast growth in services and steep falls in manufacturing, particularly in Germany, the results of a closely tracked business survey showed.
A poll of euro zone purchasing managers (PMI) signalled business activity almost ground to a halt this month as its composite index fell to a five-month low of 50.1, leaving it only slightly above the 50 mark that separates growth from contraction.
The results published by S&P Global on Wednesday were weaker than forecast by a Reuters poll of economists, who had expected a slight rise from 50.9 last month to 51.1.
Analysts warn that trade tensions and political uncertainty are likely to cause a slowdown in second-quarter growth when that data is released next week.
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“The weak figures put a question mark over a noticeable economic recovery expected by many forecasters for the second half of the year,” said Vincent Stamer, an economist at German lender Commerzbank, adding that the concerns particularly applied in Germany, the bloc’s largest economy.
The detailed PMI results showed a continued divergence between manufacturing and the larger services sector. The reading for services fell from 52.8 to 51.9, while the manufacturing index dropped from 45.8 to 45.6.
The euro zone economy stagnated for much of last year but returned to growth in the first quarter, expanding 0.3 per cent, as inflation slowed more than wages to boost household purchasing power.
S&P Global said “the economy barely moved in July” as businesses in the currency bloc reported a second consecutive month of falling orders, causing them to halt recent growth in hiring and dragging confidence in the next year to a six-month low.
“It’s unsettling how steadily companies in the manufacturing sector are slashing jobs month by month,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. But he said employment falling less than output indicated “there may still be hope for better times”.
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When the European Central Bank (ECB) held rates last week, president Christine Lagarde said “the risks to economic growth are tilted to the downside”. She noted that services are “leading the way” but manufacturing has “declined in the past few months” and investment also “remains weak”.
Price pressures on euro zone companies picked up at the fastest pace for three months, S&P found. But managers said these were not fully passed on to customers as overall selling prices rose at the slowest pace since October, reflecting increases in services and declines in manufacturing.
Economists said the weaker growth outlook made the ECB more likely to cut interest rates at its next meeting in September. However, sticky inflation in services caused by rapid wage growth is still likely to concern policymakers.
“The combination of a weakening economy and still high price pressures [are] offering some support for both the hawks and the doves,” said Franziska Palmas at Capital Economics. “On balance, though, we still think a cut in September is more likely.”
The outlook brightened in France, where some services companies reported a pickup in activity before the Olympic Games. There was also relief that this month’s parliamentary election did not hand a majority to far-right or left-wing parties even as it left the country struggling to form a government.
The French PMI rose from 48.2 to a three-month high of 49.5, above economists’ forecasts.
The survey’s results for Germany were noticeably weaker than forecast. The German PMI reading fell from 50.6 to a four-month low of 48.7, signalling a contraction of the country’s business activity. German factory output fell at the fastest rate for nine months.
But German consumer confidence rose more than forecast this month, according to separate survey results published on Wednesday by GfK and the Nuremberg Institute for Market Decisions. They said the Euro 2024 football tournament may have helped to lift consumer sentiment 3.2 points to minus 18.4, outstripping economists’ projections for a smaller rise to minus 21. – Copyright The Financial Times Limited 2024
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