Rising interest rates are hurting companies across the eurozone. As demand slows, financing costs rise, pushing some businesses to scale back operations and investments.
The PMI, or Purchasing Managers Index, signals that euro area activity contracted more quickly in August as the slowdown spread from factories to services. The survey covered more than 5,000 purchasing managers across the eurozone and produced a troubling pattern: a third straight decline in new orders for both manufacturing and services, marking the steepest drop since the trough of 2020. When excluding pandemic months, August’s fall in new orders ranks among the sharpest on record, with October 2012 flagging a similar severity for reference. This assessment comes from a report by S&P Global published midweek.
New product orders continued to fall, one of the steepest declines seen since the global financial crisis. The report also notes a deteriorating service sector demand for a second consecutive month, with August showing a rate of contraction not observed since May 2013, despite Covid-19 disruptions. The findings underscore a broad-based weakness across the region’s economy.
Major indicator
The order book remains a valuable leading signal of where the economy is headed next. The PMI is derived from surveys of executives at more than 5,000 companies in both manufacturing and services within key euro area economies, including Germany, France, Italy, Spain, the Netherlands, Austria, Ireland, and Greece. The latest data already point to a slowdown in activity across Europe in the last quarter, and the order book suggests this weakness will persist in the months ahead. An analyst from Hamburg Commercial Bank concludes that the eurozone is likely to experience a 0.2% contraction in the third quarter, highlighting the growing risk to growth and confidence across the region.
The decline in the order book aligns with forecasts of hiring slowdowns and softer business confidence in the coming months. With production needs easing, industrial firms continued to cut input purchases sharply in August, while final stock levels also eased. The momentum of demand remains soft across sectors, shaping a cautious outlook for the manufacturing and service sectors alike.
“Europe’s Sick Germany”
Much of the eurozone pressure in August stemmed from Germany, where both industrial and service sectors showed more pronounced deterioration than in France. Analysts note that this trajectory could reinforce the view of Germany as the sickly component of Europe’s economy, complicating the broader outlook for the euro area. Spain also presents a mixed picture, with pessimism rising among business leaders in July. The industrial climate survey shows weak order books and dimmer production and employment prospects. The existing order book indicates production coverage for the next roughly 4.8 months, a touch lower than the previous quarter, with demand weakness cited as the primary constraint on activity.
Across the last three months, Spain’s industrial climate remains negative, though not as dire as Germany’s or France’s readings. Spain registers a still negative sentiment score, while Germany and France show more pronounced declines or improvements that diverge from country to country. Overall, the trend points to persistent softening in forward-looking indicators and sustained caution among manufacturers and service providers as markets reallocate and adjust to tighter financing conditions and weaker demand, with the broader euro area contending with the headwinds of a slower pace of growth and shifting policy dynamics. [S&P Global]