Major economic signals point to slower activity in the euro area
In August, early indicators suggested a disruption in economic activity across France and Germany, with the euro area as a whole showing signs of a slowdown. This raised concerns about a potential recession in Europe as private sector activity slipped further, mirroring deteriorating confidence and weak household consumption amid persistent inflation pressures.
The Purchasing Managers Index (PMI), compiled by S&P Global, is closely watched by governments, businesses, analysts and central banks. The latest release confirmed the weakness in Germany and France, the eurozone’s two leading engines, with August data reflecting a continued deterioration in activity. Analysts noted a drop in confidence and a tendency for households to cut back on spending. The report also indicated that the euro area private sector contracted again in August, dragged by the performances of Germany and France. Andrew Harker, economic director of S&P Global Market Intelligence, commented on the release.
Cost-of-living pressures are restricting economic growth. The manufacturing sector remained in contraction in August and recorded a new peak in finished product stocks as companies faced weak demand. This trend suggested limited prospects for production improvement in the near term.
The possibility of a recession in the euro area, defined by two consecutive quarters of negative GDP growth, is not central to the European Central Bank scenario but remains a concern for many observers. The market narrative has increasingly treated it as a plausible risk.
Major indicator
The euro area PMI is derived from surveys of more than 5,000 managers across manufacturing and services in Germany, France, Italy, Spain, the Netherlands, Austria, Ireland and Greece. The index tracks indicators such as new orders, production, staffing, delivery times, supplier stocks, and input prices. This composite is considered a leading gauge of economic activity because it is released before many government statistics.
Uncertainty about Spain, Europe and the global economy keeps PMI in the spotlight as a forward-looking signal. A PMI reading below 50 points denotes contraction in activity.
In August, Germany’s PMI fell to 47.6, the weakest reading in 26 months, while France’s measure stood at 49.8. Beyond those two nations, the report notes that activity in the rest of the euro area continued to rise only marginally. For Spain, Airef projects a 0.2 percent contraction in the third quarter of the year.
AIReF forecasts a 0.2% drop in GDP in the third quarter
Overall, the aggregate PMI for the euro area registered 49.2 in August, down from 49.9 in July, marking the lowest level in eighteen months. A broad decline in production and activity is evident across many sectors, including basic inputs, manufacturing, tourism and real estate. S&P Global Market Intelligence’s chief economics officer noted that industrial activity fell for the third consecutive month with production dropping at a highly significant pace.
Bad and good news
Demand weakness weighed on orders, with the euro area’s purchasing managers reporting a solid drop in new orders for both manufacturing and services. Inventories of finished goods rose sharply, reaching levels not seen in more than twenty-five years of data collection for August. Rising inventories signaled poor sales prospects in the short term, even as production capacities remained under pressure.
On the upside, inflationary pressures showed signs of easing as the latest data revealed a slower rise in raw material prices. Executives also noted some relief in global supply chains as delivery times continued to lengthen but at a slower pace than previously observed. The contrast between improving supplier delivery times and still-high price pressures painted a mixed picture for businesses facing the twin challenges of demand weakness and cost pressures.
On the downside, diminished confidence, dwindling new orders and rising inventories contributed to softer hiring trends. Employment did rise among surveyed firms, but only at a slower pace for the third straight month, underscoring a cautious labor market amid the broader slowdown.