Eurozone business activity expanded in August, driven by a surge in the services sector, particularly in France due to the Olympics. However, manufacturing continued to contract and Germany’s private sector economy deteriorated, raising fears of a potential recession.
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The euro zone’s private sector grew faster than expected in August, according to preliminary Purchasing Managers’ Index (PMI) data. However, there continue to be signs of potential weakness, particularly in manufacturing in Germany and the currency area.
This month’s composite PMI index for the euro area was 51.2, up from 50.2 in July and exceeding expectations of 50.1.
This is the sixth consecutive expansion in private sector activity in the euro area and the fastest pace in three months.
However, manufacturing across the euro area continued to contract, with the manufacturing PMI index falling to 45.6, its worst reading in eight months.
Growth was mainly driven by the services sector, with the services PMI business activity index rising to 53.3, higher than the previous and expected 51.9 and marking the highest growth in four months.
A significant part of this expansion comes from France, where service activity is at its highest level since May 2022, likely driven by the Paris Olympics.
The preliminary PMI for France’s services sector rose to 55.0, marking its best performance since the second quarter of 2022, when GDP growth reached 0.4%.
Norman Liebke, an economist at Hamburg Commercial Bank, said the Olympics-related boost appears to be temporary, as evidenced by deteriorating employment conditions, softening production expectations and a shrinking order backlog.
Weak demand signals bring challenges ahead, price pressures provide relief
Despite increased business activity in August, new orders across the euro area fell for the third consecutive month, with the decline in new manufacturing orders being the largest since the end of last year.
Private sector employment also fell slightly, halting seven consecutive months of growth.
Encouragingly, inflationary pressures eased, with service input prices rising at the slowest pace since April 2021, while manufacturing cost inflation remained unchanged from an 18-month high in July.
“A closer look at the numbers shows that the underlying fundamentals may be more volatile than they appear,” said Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. He said France’s Olympic-related surge may not be sustained and that manufacturing woes could soon weigh on services.
Germany’s economy is in ‘real turmoil’
In Germany, the euro zone’s largest economy, the private sector contracted at the fastest pace in five months. The composite PMI production index fell to 48.5, lower than the expected 49.2.
Expansion in the services sector slowed, with the Services PMI index falling from 52.5 to 51.4, lower than the expected 52.3. The decline in private sector performance was caused by weak fundamental demand. German companies are increasingly pessimistic about their growth prospects for next year, citing concerns about the economic situation and political and geopolitical uncertainties.
Germany’s manufacturing sector contracted for the 27th straight month, with the PMI index falling more than expected to 42.1, the worst decline since April.
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“These numbers are truly dire. Germany’s manufacturing recession deepened in August and there is no recovery in sight,” Della Rubia said. He warned that the manufacturing industry’s woes were beginning to spill over into the services sector, raising the possibility of Germany posting negative growth for the second straight quarter.
Mr. Dell’Albia warned that while expected ECB rate cuts may provide some relief, overall sentiment remains weak.
