Business activity in the Eurozone experienced a contraction in September, accompanied by diminished demand that has alleviated some inflationary pressures. This downturn strengthens the case for a potential rate cut by the European Central Bank (ECB) in October, which is seen as essential for stimulating economic growth.
Recent preliminary Purchasing Managers’ Index (PMI) surveys indicate that the Eurozone’s private sector declined more sharply than anticipated in September, entering contraction territory reminiscent of levels last observed in January. The Composite PMI Index dropped from 51.2 to 48.9, falling short of economists’ predictions of 50.6.
Following a boost in business activity due to the Olympics in August, output in the French private sector fell back into contraction in September, paralleling declines observed in Germany, which saw its most significant drop since February. Both manufacturing and services sectors are showing a downward trend, posing increasing challenges for businesses throughout the Eurozone.
Manufacturing activity plunged from 45.9 to 44.8, marking its most acute contraction since December 2023, and extending its recessionary trend to 27 consecutive months. The services sector also showed stunted growth, dropping to 50.5 from 52.9, failing to meet expectations of 52.1, and reflecting its slowest performance since February.
The contraction in Eurozone business activity was largely fueled by a decline in new orders, shrinking backlogs of work, and diminishing confidence among firms. Consequently, job cuts were reported for the second month in a row, reaching the fastest pace of layoffs since August 2020. However, weaker demand has also contributed to easing inflationary pressures in September, thereby increasing the likelihood of additional rate cuts by the ECB.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, acknowledged, “The Eurozone is edging towards stagnation. With the swift decline in new orders and order backlog, further economic weakening appears inevitable.” He pointed out that the reduction in input and output price inflation paves the way for a possible interest rate cut from the ECB as soon as October.
France Joins Germany as Eurozone Laggard
In September, France’s private sector witnessed a significant decline, marking its lowest contraction in eight months as the previous Olympic-inspired surge gradually faded. The Services PMI in France saw a sharp drop from 55 points in August, the highest since May 2022, to just 48 in September, the lowest since March.
Dr. Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank, remarked, “It’s a disappointing reality; the strong economic growth in France experienced in August has evaporated by September. The outlook remains grim, and industrial companies are lacking in optimism. Orders from North America and major European markets like Germany are particularly affected.” He also highlighted the political instability following recent snap elections and the appointment of Prime Minister Michel Barnier, which has led to a lack of clear parliamentary majority necessary for vital economic reforms.
Market Reactions: Euro and Bond Yields Decline
The disappointing sentiment within the Eurozone’s private sector triggered negative reactions across European markets on Monday. The euro fell by 0.7% against the US dollar by 10:25 AM Central European Time, dipping below 1.11. Additionally, European bond yields saw a sharp decline with German bund yields decreasing by 15 basis points.
In equity markets, Italy’s FTSE MIB underperformed, falling by 0.7%, followed closely by France’s CAC 40, which was down 0.3%. On a slightly positive note, the Euro STOXX 50 remained flat, while Germany’s DAX saw a modest increase of 0.2%. However, banks faced significant losses, with Commerzbank shares plunging over 5% and Unicredit tumbling nearly 2% as the German government announced it would maintain its stake in the lender for the time being, putting pressure on the sector. Shares of Societe Generale dropped by 2.9%, BNP Paribas by 2.2%, ING Group by 1.7%, BBVA by 1.7%, Banco Santander by 1.4%, and Deutsche Bank by 1.3%.
Photo credit & article inspired by: Euronews
