Euro zone business activity contracted in September as weakening demand eased inflationary pressures, supporting an interest rate cut by the European Central Bank in October that is seen as necessary to boost growth.
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The euro zone’s private sector fell more sharply than expected in September, dropping to its lowest level since January and into contraction territory, according to a preliminary purchasing managers’ index (PMI) survey.
The euro zone’s composite PMI reading fell to 48.9 from 51.2, below economists’ expectations of 50.6.
French private sector production contracted again in September after a surge in business activity in August due to the Olympics, following Germany’s steepest decline since February.
Weak performance in both the services and manufacturing sectors highlighted growing challenges for businesses across Europe.
Manufacturing activity fell to 44.8 from 45.9, the biggest contraction since December 2023 and continuing the 27th consecutive month of recession. Services activity also stagnated, falling to 50.5 from 52.9, below the forecast of 52.1 and the lowest level since February.
The downturn in euro zone business activity was driven by a drop in new orders, a shrinking work backlog and dwindling confidence, which led to companies cutting jobs for a second straight month, the fastest pace of layoffs since August 2020.
However, weakening demand eased inflationary pressures in September, raising the possibility of further interest rate cuts by the European Central Bank (ECB).
“The euro area is heading towards stagnation. Given the sharp decline in new orders and backlogs, it doesn’t take much imagination to predict a further economic weakening,” said Dr. Silas de la Rubia, chief economist at Hamburg Merkbank.
Economists said slowing input and output price inflation could lead the ECB to cut interest rates as early as October.
France, along with Germany, is a laggard in the eurozone
France’s private sector contracted sharply in September, to its lowest level in eight months, as the boost from the Olympics faded. France’s services PMI bounced back sharply from 55 points in August, its highest since May 2022, to 48 points in September, its lowest since March.
“It’s a sad reality. The strong growth seen in the French economy in August has vanished in September. The situation remains tough and industrial companies are not optimistic. Orders from major European markets such as North America and Germany have been particularly affected,” said Dr Tariq Kamal Chowdhury, economist at Hamburg Merchant Bank.
Dr Choudhury added that politically, the situation remains unstable following early elections and Michel Barnier becoming prime minister, with no clear parliamentary majority to push through much-needed economic reforms.
Market reaction: Euro, bond yields fall
Weaker than expected euro zone private sector sentiment sparked a negative reaction in European markets on Monday.
By 10:25 a.m. CET, the euro had fallen 0.7% against the U.S. dollar, below 1.11. European bond yields fell sharply on the news, with German bund yields falling 15 basis points.
On the stock market, Italy’s FTSE MIB fell 0.7 percent and France’s CAC 40 lost 0.3 percent.
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The Euro STOXX 50 was flat, while Germany’s DAX rose slightly by 0.2%.
Banks were the hardest hit, with Commerzbank shares falling more than 5 percent and UniCredit shares dropping nearly 2 percent after the German government said it would keep a stake in the bank for the time being.
The announcement weighed on the banking sector, with Societe Generale down 2.9%, BNP Paribas down 2.2%, ING Group down 1.7%, BBVA down 1.7%, Banco Santander down 1.4% and Deutsche Bank down 1.3%.
