Eurozone business activity plummets, declining service industry to blame
What's the story
Eurozone business activity has taken a significant hit this month, with Germany, Europe's largest economy, experiencing a particularly sharp downturn. The Hamburg Commercial Bank's (HCOB) flash Composite Purchasing Managers' Index (PMI) fell to 47.0 in August, marking its lowest point since November 2020. A PMI number below 50 indicates contraction. As consumers grapple with rising borrowing costs, the services industry has declined. The manufacturing sector has shown some signs of recovery but not enough.
Details
Services PMI dips amid rising prices
The services PMI dropped to 48.3, dipping below the breakeven mark for the first time this year. This decline is attributed to a sharp decrease in demand as customers are deterred by rapidly rising prices. The services output prices index remained high at 55.9, although it was the lowest since October 2021 and lower than July's 56.1. These figures indicate that prices are increasing at a faster rate compared to what European Central Bank (ECB) would prefer.
Positive
Manufacturing sector shows recovery signs
In contrast, the manufacturing sector offers a glimmer of hope, as it has been struggling since mid-2022. The headline index rose to 43.7 from 42.7, marking its first increase in seven months. Additionally, an index measuring output also climbed to 43.7 from 42.7. The Purchasing Managers' Index, a survey-based indicator of business conditions, has improved, suggesting that the worst may have ended for manufacturers. This is further supported by the future output index, which rose to 53.5 from 52.8.
Insights
Inflation concerns cloud eurozone outlook
The economic outlook for the eurozone remains uncertain, with inflation reaching 5.3% in July—more than double the ECB's 2% target but significantly lower than late last year's readings. The ECB initiated its highly aggressive policy tightening in July 2022 and it is expected to be paused in September, according to most of the economists polled by Reuters. However, an additional interest rate hike by year-end remains a possibility.