Private sector activity in the Eurozone is contracting this September, weighed down by two of its heavyweights: Germany, which is still struggling to recover, and France, which is stumbling again after the rise linked to the Olympic Games. This is reflected in the preliminary data of the PMI index, prepared by S&P Global and the Hamburg Commercial Bank (HCOB), which plummeted from 51 points the previous month to 48.9 points. This index, which is compiled from the responses of purchasing managers of thousands of companies, is considered a leading indicator that measures month by month whether an economy is expanding (above 50 points) or declining (below that same threshold).
By component, the slowdown in industry is becoming more pronounced. It has worsened by one point and is now 44.8 in the index. This is the slowest pace in 2024. At the same time, a certain exhaustion of the services sector is becoming visible. Its latest advance is modest and the weakest since February: it registers 50.5 points, compared to 52.9 in the previous month. The chief economist of HCOB, Cyrus de la Rubia, believes, in light of the data, that “the euro zone is heading towards a standstill”.
The Olympic boost that boosted French trade in August quickly faded. France returned to the negative, joining Germany in reporting the biggest slowdown since February. The rest of the euro zone reported a further rise in total activity at the end of the third quarter, but the pace of expansion was slight, the weakest since January. De la Rubia believes that in the following months, “the sharp fall in new orders and the increasingly gloomy outlook for businesses regarding future business activity suggest that this lean period is far from over.”
The European industry is reeling. The emergence of Chinese competition, especially in the automotive sector, is palpable. Volkswagen made an unprecedented announcement at the beginning of this month: it is considering closing plants in its homeland, Germany. The car company reported serious profitability problems and declines in production due to a demand that has not yet returned to pre-pandemic figures. “The manufacturing sector is becoming more complicated every month. The slowdown has reached its twenty-seventh month and has even worsened in September,” adds the chief economist of HCOB.
The decline in European private activity coincides with a “sustained decline” in new orders, the report notes. While the decline in new orders and backlogs accelerated, business confidence plummeted to 10-month lows. All of this led firms to cut their workforce for the second month in a row. Although the drop in hiring levels was moderate, it is still the largest since December 2020.
Inflation and interest rates
The weakness in demand had an impact on the inflationary slowdown, both in costs and in the prices charged. Inflation in services decreased and the producer price index recorded 52 points, 1.7 less than in August and its lowest reading since April 2021. At the same time, prices paid increased slightly. Meanwhile, the European Central Bank relaxed its monetary policy. Two weeks ago, it cut interest rates by 25 basis points, to 4.25%.
Despite refusing to commit to “any concrete path of interest rates”, the ECB has set a downward trend for borrowing costs in the coming months as the CPI moderates and economic growth in the euro zone cools. By the way, Philip Lane, the chief economist of the European monetary authority, said that interest rates should continue to be reduced gradually, but that it might be necessary to accelerate the cuts “if the economy falters”. De la Rubia agrees, and points out in the report that the “quasi-paralysis” of the entire services sector could lead to a decline next month.
#Activity #Europe #contracts #time #months