An employee in Dueren, western Germany works on assembling a brake caliper for an electric vehicle.
Image Source: Ina Fassbender | Afp | Getty Images
European business activity contracted once again in August, reaching its lowest level since November 2020.
The euro zone’s flash composite Purchasing Managers’ Index (PMI), released on Wednesday, declined to 47.0 in August from 48.6 in July. This figure fell short of economists’ expectations for a reading of 48.8, according to Dow Jones.
A PMI reading above 50 indicates expansion, while a reading below 50 indicates contraction. Excluding pandemic months, the latest data shows the lowest reading since April 2013.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that the euro zone’s service sector is unfortunately following the poor performance of manufacturing in terms of downturn.
Regarding the breakdown between services and manufacturing, the former dropped to a 30-month low at 48.3, while the manufacturing PMI slightly improved from 42.7 in July to 43.7 in August.
“Taking into account the PMI figures in our GDP growth nowcast, we expect the euro zone to contract by 0.2% in the third quarter,” added Rubia.
The euro zone, consisting of 20 nations that share the euro currency, experienced a growth rate of 0.3% in the second quarter, following a 0.1% growth in the first quarter. This modest growth reflects the impact of higher interest rates, energy prices, and subdued external demand.
However, there are significant disparities within the region. Germany, for instance, reported the steepest decline in business activity in August.
“The downward pressure on the euro zone’s economy in August primarily stems from the German service sector, which abruptly shifted from growth to contraction. This, coupled with reduced manufacturing output, suggests that Germany is becoming ‘the sick man of Europe’,” said Rubia.
What does this mean for the European Central Bank?
The recent economic data is influencing discussions about the actions the European Central Bank (ECB) might take at its next meeting.
At its July meeting, ECB President Christine Lagarde stated that the central bank could either raise or pause rate hikes, depending on new data.
“We anticipate that services inflation will ease sufficiently in the coming months to convince the ECB not to continue raising rates beyond September,” stated Melanie Debono, Senior Europe Economist at Pantheon Macroeconomics, in a note to clients. However, others hold a different view.
“Stagnating employment, combined with decreasing production and lower output per head, may make the ECB more hesitant to pause the hiking cycle in September,” said Rubia.
Analysts surveyed by Refinitiv indicate that the central bank is likely to keep rates unchanged in its next month’s meeting, with the main rate currently at 3.75%.
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