Eurozone activity sees surprise contraction

Downturn has fuelled bets of more policy easing by the European Central Bank

The preliminary composite eurozone Purchasing Managers' Index (PMI), compiled by S&P Global, sank to 48.9 this month from August's 51.0. 

Eurozone business activity contracted sharply and unexpectedly this month as the bloc's dominant services industry flatlined while a downturn in manufacturing accelerated, a survey showed on Monday.

The downturn appeared broad based, with Germany, Europe's largest economy, seeing its decline deepen while France — the currency union's second biggest — returned to contraction following August's Olympics boost.

That fuelled bets of more policy easing by the European Central Bank and the euro fell sharply, on track for its biggest daily fall against the dollar in more than three months.

HCOB's preliminary composite eurozone Purchasing Managers' Index (PMI), compiled by S&P Global, sank to 48.9 this month from August's 51.0, below the 50 mark that separates growth from contraction for the first time since February.

A Reuters poll predicted a modest decline to 50.5.

Sharp decline in September

An economist at ING Bert Colijn said there was an uptick in the PMI during August but this has met a “sharp decline in September”.

“This further fuels growth concerns in the bloc as inflation worries fade,” he said.

Overall demand fell at the fastest rate in eight months. The new business index plunged to 47.2 from 49.1.

A services PMI sank to 50.5 from 52.9, below all expectations in the Reuters poll which had predicted a more modest decline to 52.1.

Eurozone government bond yields tumbled on the data, with yields on German debt falling the most.

Germany's economy contracted 0.1% in the second quarter and Monday's survey suggested it had extended its downturn during the third quarter. A recession is normally defined as two consecutive quarters of contraction.

The drop came despite firms increasing charges at a shallower rate. Services inflation eased and the output prices index came in at 52.0 versus August's 53.7, its lowest reading since April 2021.

"The one positive development is that price pressures are easing. This will be reassuring for the ECB and perhaps raises the chance that policymakers will cut the deposit rate again in October," said Andrew Kenningham at Capital Economics.

On September 12, the ECB cut interest rates again and signalled a "declining path" for borrowing costs in the months ahead as inflation slows and economic growth in the eurozone falters.

May need to speed up rate cuts

The ECB should keep cutting interest rates gradually, its chief economist has said but may need to speed up cuts if the economy falters.

Along with the ECB, central banks around the world are easing monetary policy.

China’s central bank supplied cash to its banking system for the first time in months on Monday, while the US Federal Reserve kicked off an anticipated series of rate cuts last week with a larger-than-usual 50 basis point reduction.

Meanwhile, in Britain, businesses also reported a slowdown in growth this month. 

A PMI covering eurozone manufacturing, which has been sub-50 for over two years and was forecast at 45.6, dropped to 44.8 from 45.8. An output index fell to 44.5 from 45.8.

Reuters