Economic activity in the Euro zone displayed a substantial and unpredicted downturn this month, as the leading services sector stagnated and the manufacturing industry’s decline amplified, according to a Monday survey. The slump, it seems, universally affected the region, with Germany, Europe’s chief economy, observing a deepening decline, while a contraction was noticed in France, the second largest in the monetary union, after an Olympic stimulus in August faded.
This month, the HCOB’s initial Euro zone PMI, compiled by S&P Global, plummeted to 48.9 from 51.0 in August, dropping below the 50 threshold that distinguishes growth from contraction for the first time since February. In contradiction to a Reuters poll that expected a slight fall to 50.5.
Coinciding with the extinguishing of the Olympic flame, so did the optimism in the Euro zone. The PMI saw a temporary rise in August, succeeded by a swift downturn in September. This strengthens growth-related anxieties in the region as concerns over inflation recede, stated Bert Colijn, an economist at ING.
Demand on the whole plunged to its fastest rate in eight months with the new business index stumbling down to 47.2 from 49.1. Meanwhile, despite an incremental decrease in service-related costs, the services PMI dropped to 50.5 from 52.9, falling below all predictions in a Reuters poll which predicted a milder decline to 52.1.
Despite the decline, service inflation tempered down and the output prices index was indicated as 52.0 compared to 53.7 in August – the lowest since April 2021. “The silver lining here is the abatement of price pressures. This will reassure the ECB (European Central Bank) and potentially increase the likelihood of a deposit rate cut in October,” said Andrew Kenningham of Capital Economics.
On September 12th, the ECB once again reduced interest rates and suggested a “downward trajectory” for borrowing costs in the future as inflation slows and growth in the Euro zone weakens. The ECB may need to accelerate the rate cuts if the economy continues to weaken, as suggested by its main economist last week.
Echoing the trend across the globe, central banks like China’s are providing more liquidity to its banking system for the first time in months, and the US Federal Reserve initiated a series of anticipated rate reductions last week with a higher than average cut of 50 basis points.
Reports circulating suggest that there’s a slowdown in growth reported by firms situated in Britain, which is not part of the European Union at present. This sluggish growth could prompt the Bank of England to contemplate yet another slash in interest rates.
In the past two years, a PMI that spans euro zone manufacturing, predicted to be a solid 45.6, has consistently been under 50, and now has even plunged from 45.8 to 44.8. Concurrently, there was a decline in the out-put index from 45.8 to 44.5.
This downward trend has induced a dip in business confidence, indicating that purchasing managers do not foresee an immediate upturn. Meanwhile, the index tracking future output in factories has fallen to a 52.0, an 11-month low from 57.5, according to Reuters.
The Source: Copyright Thomson Reuters 2024.