Eurozone economy faces downturn as PMI signals contraction

Commenting on the data, Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, confirmed what experts have long feared: "The eurozone is heading towards stagnation. After the Olympic effect temporarily boosted France, the eurozone heavyweight economy, the Composite PMI fell in September to the largest extent in 15 months. Considering the rapid decline in new orders and the order backlog, it doesn't take much imagination to foresee a further weakening of the economy."

The main PMI indicators for the eurozone in September 2024 are as follows: The Composite PMI for the eurozone fell to 48.9 points from 51.0 in August, reaching an 8-month low. A value below 50 points indicates an economic contraction. The Services PMI decreased to 50.5 points from 52.9 the previous month, the lowest in 7 months. Although it remains above the 50-point threshold, growth in the services sector is now only marginal.

The Manufacturing PMI dropped to 44.8 points from 45.8 in August, reaching a 9-month low. This marks the 18th consecutive month of contraction in manufacturing in the eurozone. The Manufacturing Output Index lowered to 44.5 points from 45.8, the lowest level in 9 months.

PMI data indicate a significant deterioration in the eurozone's manufacturing sector. Dr de la Rubia highlights in his analysis that the industrial situation worsens month by month. "The recession has now dragged on for 27 months and even worsened in September. Looking ahead, the sharp drop in new orders and companies' increasingly bleak outlook for future output suggest that this dry spell is far from over," he writes.

Manufacturing output fell for the 18th consecutive month, with September's decline being the fastest in 2024. Significant production reductions were noted, particularly in Germany and France, but the decline affected the rest of the eurozone.

While the service sector in the eurozone continues to grow, the growth momentum has significantly weakened. In September, the service expansion was only marginal and the slowest since February. There was a renewed decline in service activity in France, while Germany and the rest of the eurozone experienced slight growth.

The PMI report indicates the fourth consecutive monthly drop in new orders in the eurozone. Moreover, the September decline was the most significant since January 2024. In the services sector, new orders fell for the first time in seven months, while the downward trend continued in the industry.

New export orders (including intra-eurozone trade) also fell in September, extending the declining streak to 31 months. The pace of this decline was the fastest this year.

Business confidence in the eurozone fell for the fourth consecutive month, reaching its lowest since November last year. Sentiments are particularly low among manufacturers. Pessimistic forecasts mainly influenced the overall decline in confidence in the eurozone in Germany, where companies predict a production decline for the first time in a year. In contrast, sentiments slightly improved in France and the rest of the eurozone.

Falling orders and decreasing production backlogs led companies to reduce employment again in September. Dr de la Rubia notes the job market: "The downturn in eurozone business activity was driven by a drop in new orders, shrinking work backlogs, and waning confidence. As a result, companies cut jobs for the second consecutive month, with the pace of layoffs hitting its fastest since August 2020. "

Although the decline in employment was moderate, it was the sharpest decline since December 2020. In the manufacturing sector, the reduction in employment was the most significant in over four years. Meanwhile, employment continued to grow in the services sector but at the slowest pace since August 2023.

In addition to cutting jobs, Eurozone manufacturers also reduced their purchasing activity and lowered inventories of raw materials and finished goods. All these indicators declined faster in September than in August. Supplier delivery times were shortened for the eighth month in a row, though only slightly and the least in the current sequence of accelerated deliveries.

Weakening demand contributed to easing inflationary pressures in September. The rate of input cost growth significantly slowed, reaching its lowest level since November 2020. Input prices in the manufacturing sector fell for the first time in four months, while service providers experienced the weakest cost growth in three and a half years.

Consequently, the prices of products and services rose only marginally, at the slowest pace since February 2021, when the current inflation sequence began. The slower price growth in the services sector was accompanied by another decline in selling prices in the industry. Slower price increases were observed in Germany and the rest of the eurozone, while in France prices fell for the first time since February 2021.

"We expect the official employment figures in the euro zone, which have remained stable so far, to worsen in the coming months, though demographic trends should provide more stability than in previous downturns," reads S&P.

The economist also highlights the implications for monetary policy. Given that the ECB closely monitors the persistently high inflation in the services sector, the news of slowing inflation in both input costs and output prices is certainly welcome. Adding to this the deepening recession in industry and near stagnation in the services sector, the possibility of another rate cut in October may very well be considered, even though the market does not yet expect it.