Business cycle | The recovery of the euro area was strengthened: “The state of industry is downright miserable”

of the euro area economic recovery strengthened in August, according to preliminary data on the purchasing managers’ index published on Thursday.

The index, which predicts economic growth moderately reliably, was 51.2 points in August, which was more than economists’ preliminary expectations and the best reading in three months.

When the index is below 50 points, it portends a contraction of the gross domestic product. A reading of more than 50 points, on the other hand, predicts economic growth.

Economic growth was further accelerated in August by the increase in demand for services, which was the largest in France due to the Olympics.

On the other hand, the difficulties in the euro area industry continued, as production and new orders decreased based on the index.

“The state of industry in the Eurozone is downright miserable, which is mainly due to the structural problems in Germany, which are being tried to be fixed with state subsidies. A noticeable recovery in the euro area requires a pick-up in industry, which is also very important for the Finnish economy,” says the Head of Forecasting at the Institute for Economic Research Päivi Puonti.

40 percent of the value of Finland’s goods exports goes to the euro area. Therefore, the development of the Finnish economy depends a lot on the euro area.

“The economy of the euro zone is divided. In southern Europe, services are growing the economy, while in more northern Europe, industry is in trouble. From the point of view of the Finnish economy, it is worrying that the industry in the euro area is still in trouble, because a lot of investment goods are exported from here”, says the Forecasting Manager of the research institute Laboren Juho Kostiainen.

International the International Monetary Fund (IMF) predicts that the economy of the euro area will grow by 0.9 percent this year and 1.5 percent next year.

One factor influencing the recovery of the euro area is monetary policy. The European Central Bank will probably lower its key interest rates in September, which would be apt to speed up economic growth.

“There is still price pressure in services, but despite that, I believe that the European Central Bank will continue to cut interest rates in September in order to secure economic recovery, because inflation has already slowed down significantly in any case,” says Kostiainen.

Consumer prices the rise in prices, i.e. inflation, was 2.6 percent in the euro area in July. In July last year it was 5.3 percent and in July 2022 it was 8.9 percent.

According to the price stability objective of the European Central Bank, inflation should be two percent in the medium term.

“A weak economy would favor more interest rate cuts in the fall, but the strong demand for services may mean that inflation will not necessarily slow down quite as fast as expected,” says Puonti.