The European economy is stagnating. Again.
Preliminary PMIs for June, released on Friday, showed activity across the bloc all but flatlined early this month in a return to the no-growth quagmire that persisted during the first quarter. The surveys continued to suggest European manufacturing is grappling with recessionary conditions.
The flash read for this month on the bloc-wide, headline gauge was 50.3, well below consensus and perilously close to the contraction threshold. It was the worst print in five months. The MoM drop was the largest in a year.
Inflows of new business stalled last month, and the situation worsened in June, when new orders fell for the first time since January. “The deteriorating demand environment signals downside risks to output in July,” the color accompanying the report said.
Revisions released earlier this month showed Europe fell into recession over the winter after all, and the ECB isn’t done raising rates.
The malaise is concentrated on the factory side, where S&P Global’s gauge, published in conjunction with Hamburg Commercial Bank, slid to a 37-month nadir. It’s registered below the 50 demarcation line in 11 of the last 12 months. As you can imagine, the situation is especially pronounced in Germany, where factory order books dropped at the briskest rate in eight months amid customer hesitation and apparent de-stocking.
But even on the services side, things are slowing down. “The recent resurgence in spending on services lost momentum,” the bloc-wide release said, noting that new business growth was tepid, signaling “only a modest increase in demand.” The services gauge for France printed a contractionary 48, which counted as a 28-month low. French services firms cited inflation, “more challenging financial conditions such as difficulties securing credit” and, less frequently, business shutdowns, for the fall in activity.
As ever, the silver lining in lackluster activity data is the disinflationary read-through. On the manufacturing side, it’s deflation. Europe’s factories saw average input prices fall a fourth straight month. The rate was the most pronounced since July of 2009. In services, the rate of input cost inflation, while still elevated by historical standards, was nevertheless the slowest in more than two years.
Firms aren’t especially chipper. “Optimism about the year ahead fell in June to the greatest extent since last September, sliding to its lowest level so far this year,” S&P Global said.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, summed up the situation quite succinctly on Friday. “If the ECB only had to control goods prices, then Frankfurt would toast the end of inflation,” he said. “But… in the more important part of the economy, the private services sector, prices continue to rise, and that’s why the core rate of inflation has been so slow to decline.”
And that, in turn, is why the ECB will be “so slow” to pivot to anything that even looks like a conciliatory stance. Terminal rate expectations came off a bit Friday, but the ECB is going to need more than a couple of downbeat PMI readings to dissuade them from one, and probably two, additional rate hikes.
“The sluggish economic picture combined with continued improving inflation would appear to be dovish for the ECB [but] none of this will provide a catalyst for the bank to change direction on rate hikes,” ING’s Bert Colijn said Friday. “Policymakers seem to prefer too much, rather than too little tightening right now.”
