Euro zone services slide deepens economic gloom-PMI

People walk past a restaurant at the Butte Montmartre in Paris, France, July 10, 2023. REUTERS/Sarah Meyssonnier/File photo

LONDON  – The downturn in euro zone business activity has deepened far more than thought this month in a broad-based fall across the region, particularly in Germany, Europe’s largest economy, a survey showed.

In the bloc’s dominant services industry activity fell into decline and while the contraction in manufacturing output continued there were however some signs of a turnaround.

HCOB’s flash Composite Purchasing Managers’ Index (PMI) for the bloc, compiled by S&P Global and seen as a good barometer of overall economic health, dropped to 47.0 in August from July’s 48.6, its lowest since November 2020.

That was well below the 50 mark separating growth from contraction and lower than all expectations in a Reuters poll which had predicted a slight dip to 48.5.

A chunk of that activity was driven by firms completing old orders. The backlogs of work index fell to 45.2 from 46.0, its lowest since June 2020 when the COVID pandemic was cementing its grip on the world.

The services PMI sank to 48.3 from 50.9, its first time below the breakeven mark this year, as indebted consumers feeling the pinch from rising borrowing costs reined in spending. The Reuters poll had predicted a reading of 50.5.

“The service sector of the euro zone is unfortunately showing signs of turning down to match the poor performance of manufacturing,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

“Indeed, service companies reported shrinking activity for the first time since the end of last year, while output in manufacturing dropped again.”

Demand fell sharply as prices rising far faster than the European Central Bank would like put off customers. The services output prices index remained elevated at 55.9, albeit the lowest since October 2021 and below July’s 56.1.

The ECB embarked on its most aggressive policy tightening path in July 2022 but will pause in September, according to a narrow majority of economists polled by Reuters, although a further rise in interest rates by year-end is still on the cards with inflation running hot.

Inflation was 5.3 percent in July, official data showed, more than double the ECB’s 2-percent target but well below readings seen late last year.

READ: Euro zone inflation falls further in comforting sign for ECB

Manufacturing activity has been in decline since mid-2022, but the latest PMI survey offered some hope the nadir may have been passed. The headline index rose to 43.7 from 42.7, its first uptick in seven months and confounding expectations in the Reuters poll for a dip to 42.6.

READ: Euro zone factory July activity fell at fastest pace since onset of COVID -PMI

An index measuring output, which feeds into the composite PMI, rose to 43.7 from 42.7.

“Is a bottom in sight in the manufacturing sector? Perhaps, as the PMI headline index, though still in shrinking territory, has increased somewhat. This happened on the back of a slightly better order situation as well as slower destocking,” de la Rubia said.

Optimism among factory purchasing managers improved, also suggesting the worst may be over for manufacturers, with the future output index rising to 53.5 from 52.8.