Europe Reports Declining Business Activity, Service Sector Slowdown Drags PMI

Euro Zone’s flash composite PMI fell to 47.0 in August. This contraction marks the lowest reading for Europe’s business activity since April 2013, if the pandemic months are excluded from the data. 

Europe saw a contraction in it’s business activity to the lowest level since November 2020. The Euro Zone’s flash composite Purchasing Managers’ Index (PMI), released on Wednesday, fell to 47.0 in August. 

According to a CNBC report, Europe’s composite PMI for July stood at 48.6. The August number missed economists’ expectations of 48.8, the report noted. This contraction marks the lowest reading for Europe’s business activity since April 2013, if the pandemic months are excluded from the data. 

A number above 50 in the composite PMI indicates an expansion in activity, while below 50 represents a contraction. This contraction was stated to be a consequence of the slowdown in the services sector. 

Hamburg Commercial Bank’s chief economist, Cyrus de la Rubia, said the region’s service sector is “unfortunately showing signs of turning down to match the poor performance of manufacturing,” as cited in the report.

Between the services and manufacturing sectors, while the services sector dipped to a record 30-month low at 48.3, the manufacturing PMI increased marginally from 42.7 in July to 43.7 in August. Rubia commented, “Considering the PMI figures in our GDP [growth] nowcast leads us to the conclusion that the euro zone will shrink by 0.2% in the third quarter.”

Comprised of 20 countries sharing the same euro currency, the Euro Zone witnessed a growth of 0.3 per cent in the second quarter, compared to a growth of 0.1 per cent in the first quarter. This decline in growth indicated the effect of increased interest rates, energy prices, and reduced global demand on the economy. Country-wise, Germany reported the deepest contraction in business activity in the period. 

“The downward pressure on the economy of the euro zone in August stems mainly from the German service sector which switched from growth to contraction at an unusual pace,” said Rubia. The economist further called Germany “the sick man of Europe” due to it’s declining output in manufacturing. 

The report stated that now the attention will be focused on the European Central Bank’s reaction to the data in terms of it’s decision about interest rates. The bank is set to meet next month and take a call on either raising or pausing the interest rate hikes.

Rubia added, “Stagnating employment combines with decreasing production and results therefore in lower output per head. As a result, the ECB may be more reluctant to pause the hiking cycle in September.” 

However, not all economists share this opinion. Melanie Debono, senior Europe economist at Pantheon Macroeconomics, told her clients, “We continue to expect services inflation to ease enough over the coming months to convince the ECB to not hike past September,” as quoted in the report.

The report added that Refinitiv took a poll of analysts who stated that the bank is most likely going to keep the rates unchanged in the next month.