Eurozone business activity expanded in August, driven by a surge in the services sector, notably in France due to the Olympic Games. However, manufacturing continued its contraction, and Germany's private sector economy worsened, raising concerns about a potential recession.
ADVERTISEMENTThe eurozone's private sector showed stronger-than-expected growth in August, according to preliminary Purchasing Managers' Index (PMI) surveys. However, signs of underlying weaknesses persist, particularly in Germany and in the currency bloc’s manufacturing sector.
The Composite PMI Index for the broader eurozone rose to 51.2 this month, up from 50.2 in July and exceeding expectations of 50.1.
This marks the sixth consecutive expansion in eurozone private sector activity and the fastest in three months.
However, manufacturing across the eurozone continued to contract, with the Manufacturing PMI Output Index falling to 45.6, the worst reading in eight months.
Growth was driven largely by the service sector, with the Services PMI Business Activity Index climbing to 53.3 - surpassing both the previous and expected 51.9 - marking its strongest growth in four months.
A significant part of this expansion stemmed from France, where services activity reached its highest level since May 2022, likely buoyed by the Olympic Games in Paris.
The Flash PMI for French services surged to 55.0, marking its strongest performance since the second quarter of 2022, a period when GDP growth hit 0.4%.
Norman Liebke, an economist at Hamburg Commercial Bank, noted that this Olympic-related boost appears to be temporary, as evidenced by worsening employment conditions, weaker output expectations, and shrinking work backlogs.
Weak demand signal challenges ahead, price pressures offer a relief
Despite the uptick in the August business activity, new orders across the eurozone decreased for the third consecutive month, with the largest reduction in manufacturing new orders since late last year.
Employment in the private sector also saw a slight decline, ending a seven-month growth streak.
Encouragingly, inflationary pressures eased, with services input prices rising at their slowest pace since April 2021, while manufacturing cost inflation remained unchanged from the 18-month high in July.
“A closer look at the numbers reveals that the underlying fundamentals might be shakier than they appear,” commented Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. He noted that the Olympic Games-related surge in France might not be sustained, and the struggles in the manufacturing sector could soon weigh on services.
Germany’s economy in a “real mess”
In Germany, the eurozone's largest economy, the private sector contracted at its fastest pace in five months. The Composite PMI Output Index fell to 48.5, below the expected 49.2.
The services sector's expansion decelerated, with the Services PMI Index dropping to 51.4 from 52.5, falling short of the anticipated 52.3. The decline in the private sector's performance was driven by weaker underlying demand. German businesses became increasingly pessimistic about growth prospects for the coming year, citing concerns over economic conditions, as well as political and geopolitical uncertainties.
The German manufacturing sector saw its 27th consecutive month of contraction, with the PMI gauge tumbling more than expected to 42.1—its worst drop since April.
ADVERTISEMENT“These numbers are a real mess. The recession in Germany’s manufacturing sector deepened in August, with no recovery in sight,” de la Rubia stated. He warned that the struggles in manufacturing are starting to spill over into the services sector, raising the likelihood of a second consecutive quarter of negative growth in Germany.
While anticipated ECB interest rate cuts might provide some relief, de la Rubia cautioned that overall sentiment remains poor.
