An unfortunate read on private sector business activity suggested the European economy lacks dynamism on the one-year anniversary of the ECB’s rate-hiking campaign.
Preliminary reads on S&P Global’s PMIs for July painted a grim picture (“bleak” as one bank put it), particularly in the moribund manufacturing sector, where a 42.7 print counted among the worst in decades.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank which collaborates with S&P Global on the PMIs, called manufacturing “the Achilles heel of the eurozone.”
The situation was positively dire in Germany, where the factory gauge fell to 38.8, dragging the composite index for the world’s fourth-largest economy into contraction. The release flagged a “sharp decrease in demand for goods and services” reflecting “a range of factors, including customer hesitancy, destocking, high inflation and rising interest rates.” De la Rubia called the drop in new orders and work backlogs in Germany “jaw dropping.”
In France, both manufacturing and services activity contracted simultaneously for a second straight month. Overall business activity receded at the fastest pace since November of 2020. At 47.4, France’s services activity gauge sits at a 29-month low.
The sharp slowdown in new orders across the eurozone prompted companies to “rel[y] on previously placed orders to support current operating levels.” The attendant drop in overall backlogs was the most pronounced in a decade. That, in turn, undercut confidence, which fell in both manufacturing and services.
“The eurozone economy will likely move further into contraction territory in the months ahead, as the services sector keeps losing steam,” de la Rubia went on.
The drop on the composite gauge was the third straight. At 48.9, it’s now squarely in contraction territory.
On the bright side, inflation pressures moderated further. Input costs fell a 10th month, and the increase in prices charged was the slowest in nearly two and a half years.
That’ll be small comfort to the ECB, though. “The latest PMI reading is not going to please ECB officials as prices in the private sector are still creeping up, led solely by the services sector,” S&P Global remarked.
Christine Lagarde is guaranteed to raise rates by another 25bps this week. The bank will likely hike again in September, although deteriorating growth data could change the calculus. Core inflation, which was revised higher for June in the final reading, is still near record highs.
“The survey[s] continue to suggest moderating price pressures, but the impact of wages on services will remain a concern for ECB hawks,” ING’s Bert Colijn said Monday.
The euro fell. On a nominal effective exchange rate basis, the common currency is near the most expensive on record, a headwind for exports, particularly to China, where demand is soft. The currency, Jefferies’ Brad Bechtel said last week, “has no business up here, and it knows it.”
