Activity data released on Friday offered scant evidence to suggest the European economy can avoid a stagflationary quagmire amid elevated rates and stubborn underlying inflation.
Flash PMIs for September painted a disheartening, if not wholly disastrous, picture. At 47.1, S&P Global’s composite gauge for the region managed to top estimates, but nevertheless spent a fourth month in contraction.
The small uptick from August’s final reading was the first month-to-month increase since April.
The services PMI printed 48.4, up slightly, but still indicative of contraction. The manufacturing PMI remained mired in a deep slump. 43.4 was effectively unchanged from August.
Although the situation in Germany improved at the margins, France’s downturn accelerated. At 43.6 and 43.9, the manufacturing and services gauges printed 40- and 34-month lows, respectively. The color accompanying the country-specific release for France described “broad-based weakness” amid “widespread reports” of lackluster demand.
“The French economy is steering towards some choppy waters,” Norman Liebke, an economist at Hamburg Commercial Bank, which collaborates with S&P Global on the releases, said Friday, adding that although joblessness in France currently sits at the lowest in 15 years, this month’s “sharp decline in business activity in the services sector suggests… unemployment should rise in the coming months.”
In Germany, a meaningfully better reading on services activity suggested that side of the world’s fourth-largest economy has mostly stabilized, a development Hamburg Commercial Bank’s chief economist Cyrus de la Rubia cautiously celebrated as “a pleasant surprise.” Although German manufacturing activity remained under pressure, there was some evidence of improvement there too. “It’s no secret that the German manufacturing sector has been going through the wringer lately [but] things aren’t going downhill as fast as before,” de la Rubia remarked.
On net, the worsening outlook for France and the still tenuous situation in Germany left the bloc-wide gauges struggling to get back to the 50 demarcation line that separates expansion from contraction.
“While better than analysts had expected, the overall picture remains rather bleak on economic growth and adds to contraction concerns,” ING’s Bert Colijn wrote. “Still, at least today’s PMI indicates that the deterioration of conditions has stopped for the moment.”
It’s just as likely as not that the European economy will show a contraction for Q3. Whether the actual figures show a downturn or stagnation is largely irrelevant. The economy is weak.
The latest ECB forecasts found staff marking down their outlook for growth while marking their inflation forecasts higher, an inauspicious conjuncture to be sure.
On Friday, de la Rubia said the services PMIs are “serving up a bitter pill for the European Central Bank.” “Input prices, where wages play an important role, have sped up in September for the second month in a row,” he went on. “The heat shows that the risk of a wage-price spiral must remain very much on the radar.”
