Euro Zone Business Activity Contracts to Lowest Level Since November 2020
European business activity in the euro zone contracted once again in August, reaching its lowest level since November 2020. The flash composite Purchasing Managers’ Index (PMI) for the euro zone fell to 47.0 in August, compared to 48.6 in July, missing economists’ expectations of 48.8, according to Dow Jones. A reading below 50 indicates contraction in activity.
These figures suggest that the euro zone’s recovery from the impact of the pandemic is slowing down. If pandemic months are excluded, this marks the lowest reading since April 2013. Cyrus de la Rubia, a chief economist at Hamburg Commercial Bank, stated that the service sector of the euro zone is showing signs of declining, matching the poor performance of manufacturing.
The breakdown of the PMI figures reveals that the services sector dropped to a 30-month low at 48.3, while the manufacturing PMI rose slightly from 42.7 in July to 43.7 in August. Rubia predicts that the euro zone’s GDP will shrink by 0.2% in the third quarter, considering the PMI figures.
The euro zone, which consists of 20 nations sharing the same euro currency, experienced growth of 0.3% in the second quarter, following a growth of 0.1% in the first quarter. However, this lackluster growth exposes the impact of higher interest rates, energy prices, and subdued external demand.
Despite the overall decline in business activity, there are significant differences within the region. Germany, for instance, reported the deepest contraction in business activity in August. Rubia highlighted the German service sector’s switch from growth to contraction, stating that Germany is becoming “the sick man of Europe.”
The recent economic data is fueling discussions about the actions the European Central Bank (ECB) might take at its next meeting. During its July meeting, ECB President Christine Lagarde mentioned the possibility of either raising or pausing rate hikes, depending on new data. Analysts polled by Refinitiv suggest that the ECB will likely leave rates unchanged next month, with its main rate currently at 3.75%.
Melanie Debono, senior Europe economist at Pantheon Macroeconomics, believes that services inflation will ease enough to convince the ECB not to hike rates beyond September. However, Rubia disagrees, stating that stagnating employment and decreasing production may make the ECB more reluctant to pause the hiking cycle.
As the euro zone’s recovery faces challenges, economists and analysts are closely watching for any shifts in economic indicators and the decisions the ECB will make in the coming months in response to the evolving situation.