The euro area preliminary ‘flash’ PMI surveys hinted at a further deterioration in economic activity in July. The manufacturing PMI dropped further below the ‘50’ expansion/contraction level to 46.4 from June’s 47.6, reflecting a more rapid rate of contraction in output and total orders, as well as contraction in employment. The sector’s export orders index dropped to 44.3, the softest since late 2011, as global trade tensions continue to be elevated.
The manufacturing PMI for Germany was especially soft, dropping to only 43.1, a seven-year low. The outturn for France’s manufacturing PMI was also disappointing, falling to 50 from 51.9. Yesterday’s reports implied that German economics ministry expects softness in the industrial sector to persist in the months ahead, while a recent survey by the IFO institute implies that firms are curtailing their wage costs by reducing working hours, with the government making up the shortfall in employees’ wages.
Service sector activity in the euro area continues to grow, countering the more challenging backdrop for manufacturing. The services PMI continued to be in expansion territory, in spite of falling to 53.3 in July from 53.6, reflecting stronger domestic demand. Service activity has still decelerated in the last 18 months, although to a lesser degree than in manufacturing. German services PMI dropped to 55.4 from 55.8, while it dropped in France to 52.2 from 52.9, although that continues to be above levels seen at the end of 2018 / early 2019.
“Overall, the survey is signalling Eurozone GDP growth slowing to 0.2 percent in Q2, with the latest indicators suggesting a tilt towards a 0.1 percent quarterly pace at the start of Q3”, noted Lloyds Bank in a report.
This would be a worry for the ECB as it battles to meet its inflation goal. The ECB’s policy meeting is set to take place tomorrow and is likely to announce preparations for an interest rate reduction in September.
“Today’s figures, however, suggest that its latest June forecasts are already too optimistic, raising the risk that the ECB may decide to implement more stimulus as soon as tomorrow”. Added Lloyds Bank.
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