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Closely tracked business surveys show the euro zone economy is slowing sharply, with weaker-than-expected growth in services and a sharp decline in manufacturing, particularly in Germany. .
A poll of purchasing managers in the euro area showed that the composite index fell to a five-month low of 50.1, remaining just above 50, the dividing line between growth and contraction, this month. It was suggested that business activities were almost at a standstill.
S&P Global’s results on Wednesday fell short of expectations in a Reuters survey of economists, which rose slightly to 51.1 from 50.9 last month.
Analysts have warned that trade tensions and political uncertainty are likely to cause growth to slow in the second quarter, with figures to be released next week.
“The weak numbers cast doubt on the significant economic recovery in the second half of this year that many forecasters had expected,” said Vincent Starmer, an economist at German financial giant Commerzbank. He added that this applies to Germany, which has a large economy. .
Detailed PMI results showed continued divergence between manufacturing and large services sectors. The services index fell from 52.8 to 51.9, and the manufacturing index fell from 45.8 to 45.6.
The eurozone economy stagnated for much of last year, but returned to growth in the first quarter, expanding by 0.3% as inflation slowed more than wages as households boosted their purchasing power.
S&P Global said the economy “performed weakly in July” as companies in the currency bloc reported a second straight month of declines in orders, recent job growth stalled and confidence for next year fell to a six-month low. It hardly moved.”
“We are worried that companies in the manufacturing sector are steadily cutting jobs month after month,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. But he said the decline in employment was lower than output, indicating that “there may still be hope for an upturn.”
When the European Central Bank kept interest rates on hold last week, President Christine Lagarde said: “The risks to economic growth are tilted to the downside.” He said that while services were “leading the way”, manufacturing had “declined in the past few months” and investment “remains weak”.
Price pressure on euro zone companies rose at the fastest pace in three months, S&P said. However, executives said these were not fully passed on to customers as overall sales prices rose at the slowest pace since October, reflecting an increase in services and a decline in manufacturing.
Economists said the weakening growth outlook made it more likely that the ECB would cut interest rates at its next meeting in September. However, the persistence of service inflation driven by rapid wage increases is likely to remain a concern for policymakers.
“The combination of a slowing economy and still-high price pressures is providing some support for both hawks and dovs,” said Franziska Palmas of Capital Economics. “But overall, we think a September rate cut is still likely.”
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In France, the outlook brightened as some service companies reported increased activity ahead of the Olympics. There was also a sense of relief that, despite struggling to form a government, the country did not cede its majority to far-right or left-wing parties in this month’s parliamentary elections.
France’s PMI rose to a three-month high of 49.5 from 48.2, beating economists’ expectations.
The results for Germany were significantly lower than expected. Germany’s PMI index fell from 50.6 to a four-month low of 48.7, suggesting a contraction in business activity in the country. German factory output fell at the fastest pace in nine months.
But German consumer confidence rose more than expected this month, according to a separate survey released Wednesday by GfK and the Nuremberg Institute for Market Decision Making. They said the Euro 2024 soccer tournament may have pushed consumer sentiment up by 3.2 percentage points to -18.4, exceeding economists’ expectations for a modest rise to -21.
