In July, business activity in the eurozone experienced a significant decline, reaching its fastest rate in eight months, according to data from a purchasing managers’ survey. The HCOB Flash Eurozone Composite PMI Output Index, which measures activity in both the manufacturing and services sectors, dropped to 48.9, falling below the contraction threshold and coming in lower than expected.
Contraction in the Eurozone Economy
The reading of 48.9 in July, down from a revised 49.9 in June, indicates a contraction in the eurozone economy. Economists surveyed by The Wall Street Journal had predicted a PMI of 49.7, highlighting the unexpected severity of the decline.
Services Sector Losing Steam
Hamburg Commercial Bank’s Chief Economist, Cyrus de la Rubia, warns that the services sector is steadily losing momentum. De la Rubia believes that the eurozone economy will likely continue to contract in the coming months as a result of this trend.
Weakening Manufacturing Activity
Declining manufacturing activity is consistently dragging down the eurozone’s overall performance. In July, the manufacturing sector recorded a 38-month low, while the services sector hit a six-month low. De la Rubia emphasizes that manufacturing remains the “Achilles heel of the eurozone,” and predicts a continuation of this slump throughout the second half of the year.
Worsening Demand Conditions and Pricing Pressures
The latest report from HCOB highlights the deteriorating demand conditions, as new-business inflows have been declining at an increasingly severe rate. In fact, the fall in new orders has surpassed the decline in output, marking a level of decline not seen since February 2009, during the financial crisis.
According to the survey, manufacturers have also been faced with declining prices, reaching the steepest rate since 2009. This decline in prices is a result of slumping demand.
However, it is worth noting that prices in the services sector are still on the rise. This development may not sit well with European Central Bank officials, especially considering their upcoming rate decision on Thursday.
There is a general expectation that the ECB will raise rates during the meeting. The debate among analysts revolves around whether the key interest rate will be raised by 25 or 50 basis points.
Furthermore, recent data from purchasing managers indicates a decrease in activity in both France and Germany. These findings add to the challenging economic climate that lies ahead.
It is important to mention that the eurozone managed to avoid a recession this past winter. Updated Eurostat data revealed that the euro area economy remained stagnant in the first quarter of this year, following a 0.1% contraction in the previous quarter of 2022. Economists polled by FactSet expect that eurozone GDP will expand by 0.5% in 2023 as a whole.
In conclusion, while the PMIs foretell a difficult economic environment, it is comforting to know that the eurozone as a whole has not entered a recession. However, challenges lie ahead as demand conditions worsen and pricing pressures persist.