Euro Zone Business Activity Declines More Than Expected in August
LONDON, Aug 23 (Reuters) – Surveys have shown that Euro zone business activity declined significantly in August, with a particularly fast slide in Germany. Additionally, some inflationary pressures have returned, further complicating matters for the European Central Bank (ECB) as it aims to control rampant price rises without causing a recession.
According to a Reuters poll, a narrow majority of economists expect the ECB to pause interest rate hikes in September, despite elevated inflation. However, there is still the possibility of a further rise in rates 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. He added, “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. Manufacturing output continued to contract, although there were some signs of a turnaround for factories.
The flash Composite Purchasing Managers’ Index (PMI) for the Euro zone dropped to 47.0 in August, its lowest level since November 2020, according to HCOB. This was well below expectations and suggests a contraction in economic growth.
Germany, as Europe’s largest economy, contracted at its fastest pace in over three years. Manufacturing output declined, accompanied by a renewed contraction in services. Firms in Germany remain pessimistic due to rising interest rates, customer uncertainty, and high inflation, which continue to weigh on demand.
In France, the dominant services sector contracted further as demand and new orders fell. This raises concerns about a contraction in the Euro zone’s second-largest economy in the third quarter.
Meanwhile, Britain’s economy, which is outside the European Union, is at risk of shrinking in the third quarter and potentially falling into a recession. The PMI for the country showed a slump in factory output and broader weakness due to higher interest rates.
Euro zone government bond yields and the euro tumbled following the release of the data, as traders anticipate a possible pause in the ECB’s interest rate hiking campaign.
Inflation in the Euro zone was 5.3% in July, well above the ECB’s target of 2%, but lower than previous readings. Manufacturing activity has been declining since mid-2022, but the latest PMI survey suggests that the worst may be over, as the headline index rose for the first time in seven months.
Optimism among factory purchasing managers improved, indicating that the situation may be improving for manufacturers.
Overall, the Euro zone’s economic outlook remains uncertain as the ECB attempts to navigate the challenges posed by inflation and declining business activity.