The Services PMI rose last month, mainly due to France’s optimistic outlook for the Olympics. However, now that the Olympics are over, sentiment in the services sector is trending downward again. The Services PMI fell to 50.5 in September, indicating a general slowdown in activity. Manufacturing output also fell to 44.5 from 45.8. This is an overall poor end to the quarter, and means that GDP growth is likely to weaken further from its already modest pace of 0.3% quarter-on-quarter.
The inflation outlook appears to be improving significantly as the PMIs indicate a sharp slowdown in business input cost inflation. This applies to both services and goods, even as wage growth and transportation costs remain high. As a result, lower cost inflation translates into a slowdown in selling price inflation.
The publication of Draghi’s report has raised concerns about the weakness of economic activity in the euro area. While Draghi’s concerns are structural, the cyclical situation of the euro area economy perfectly illustrates why Europe needs to boost growth. After the stagnation following the energy price shock, the euro area economy has now barely recovered. With inflation once again approaching the ECB’s 2% target, the main concern has now shifted from inflation to growth.
