Euro zone business activity contracted unexpectedly sharply this month, a survey showed on Monday, as the bloc’s main services sector flatlined and manufacturing slowed at a faster clip.
The downturn appears widespread, with Europe’s largest economy, Germany, sinking deeper and the monetary union’s second-largest, France, slipping back into recession after an Olympics stimulus package in August.
This raised expectations of further monetary easing from the European Central Bank (ECB), causing the euro to plummet and be on track to post its biggest drop against the dollar in more than three months.
The flash euro zone composite purchasing managers’ index (PMI) compiled by S&P Global fell to 48.9 this month from 51.0 in August, dropping below the 50 mark that separates growth from contraction for the first time since February. A Reuters poll had forecast a modest decline to 50.5.
“Just as the Olympic flame has been extinguished, so has euro zone optimism. The rise in August’s PMI was met with a sharp decline in September. Euro zone growth concerns are growing further as inflation fears fade,” said Bert Collin, economist at ING.
Overall demand fell at the fastest pace in eight months. The new business index plummeted to 47.2 from 49.1.
The services PMI fell to 50.5 from 52.9, below all expectations in a Reuters poll, which had forecast a more moderate decline to 52.1.
The data caused eurozone government bond yields to fall sharply, with German bund yields falling the most.
Germany’s economy shrank 0.1% in the second quarter and a survey on Monday suggested the recession continued in the third quarter. A recession is usually defined as two consecutive quarters of contraction.
“A technical recession seems to be priced in,” said Cyrus de la Rubia, chief economist at Hamburg Merchant Bank, who predicted the German economy would shrink 0.2 percent in the current quarter.
Price pressure eases
The fall came despite businesses gradually raising rates. Services inflation eased, with the output price index falling to 52.0 from 53.7 in August, the lowest since April 2021.
“The only positive thing is that price pressures are easing, which will be reassuring for the ECB and may increase the likelihood that policymakers will cut deposit rates again in October,” said Andrew Kenningham of Capital Economics.
The European Central Bank (EBC) cut interest rates again on September 12, signalling a “downward trend” in borrowing costs over the coming months as euro zone inflation slows and economic growth stagnates.
The ECB’s chief economist said last week that the ECB should continue to cut interest rates gradually, but may need to cut rates faster if the economy weakens.
Central banks around the world are easing monetary policy.
The People’s Bank of China pumped cash into the banking system for the first time in months on Monday, while the U.S. Federal Reserve kicked off a series of expected interest rate cuts last week with a larger-than-usual 50 basis point cut.
Meanwhile, outside the European Union, in Britain, businesses have reported slowing growth this month, which could prompt the Bank of England to consider cutting interest rates again.
The euro zone manufacturing PMI, which has been below 50 for more than two years, fell to 44.8 from 45.8 rather than the forecast of 45.6. The production index fell to 44.5 from 45.8.
Business optimism faded, suggesting purchasing managers don’t expect an economic recovery anytime soon, while an index of future factory production fell to 52.0, the lowest in 11 months, from 57.5.
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