Invezz.com – Eurozone business activity unexpectedly contracted in September, suggesting worsening problems in both the services and manufacturing sectors.
The region’s Purchasing Managers’ Index (PMI) compiled by S&P Global fell sharply to 48.9 from 51.0 in August, marking the first contraction since February.
The decline has been driven by weak demand and economic problems in major economies such as Germany and France, raising major concerns about future growth prospects and intensifying speculation about potential policy easing by the European Central Bank (ECB).
The PMI’s fall below the key threshold of 50 highlights the deteriorating economic situation across the euro area.
The services PMI fell sharply to 50.5 in September from 52.9 in August, while the manufacturing index dropped to 44.8 from 45.8.
Germany’s struggles
Germany, the region’s largest economy, has been particularly affected, contracting by 0.1% in the second quarter and forecast to fall further in the third quarter.
Economists have warned that a technical recession, defined as two consecutive quarters of negative growth, is becoming increasingly likely.
Germany’s struggles reflect a broader trend, with France also shrinking after a period of growth fuelled by the Olympics earlier this year.
Broader weakness in the euro area, combined with easing inflationary pressures, is expected to leave the economic outlook fragile over the coming months.
In the services sector, which had previously shown relatively strong growth, the PMI showed a significant slowdown in September, falling to 50.5, below all expectations.
Businesses are experiencing a sharp decline in new orders, with the new business index falling to 47.2, the biggest contraction in eight months.
Although price pressures have eased, analysts have suggested the ECB may need to cut interest rates more aggressively to stimulate demand.
Some predict further cuts in deposit rates could be introduced as early as October to ease the economic downturn.
Manufacturing continues to face challenges
Meanwhile, euro zone manufacturing continues to face tough challenges, with the PMI falling to 44.8, the lowest level since early 2023.
This marks the 26th consecutive month that the index has fallen below 50, indicating a sustained economic downturn.
Business optimism weakened significantly as the production index fell to 44.5 in September and the future production index dropped to 52.0, the lowest level in 11 months.
This persistent weakness has raised concerns about a possible insufficient stabilisation of demand and the continuing impact of wider macroeconomic uncertainty on European factories.
Recent data also suggests that inflation in the euro zone, a major concern for businesses, is easing slightly.
The Services Output Price Index fell to 52.0, the lowest level since April 2021.
Although inflationary pressures remain, this development has given policymakers some hope, with many economists suggesting the ECB may consider cutting interest rates in October.
Overall, business sentiment across the eurozone remains gloomy, with September’s PMI data raising concerns that the ECB’s recent measures may not be enough to avert a prolonged recession.
As central banks around the world adjust their monetary policies, Europe is at a critical juncture and further stimulus will likely be needed to stabilise growth and restore confidence in the economy.
This article first appeared on Invezz.com.
