Eurozone Private Sector Stuck In Contraction Zone On Sharp Fall In Demand

Despite a moderate improvement, the euro area private sector remained in the contraction territory in September, adding to fears of a recession in the second half of the year.

The flash results of the purchasing managers’ survey by S&P Global showed that the HCOB flash composite output index rose to 47.1 in September from 46.7 a month ago, while it was expected to fall to 46.5.

However, the score remained below the neutral 50.0 mark for the fourth straight month, suggesting contraction. There were declines in output across services and manufacturing sectors.

The services Purchasing Managers’ Index, or PMI, posted 48.4, up from 47.9 a month ago. The reading was forecast to fall to 47.7.

At 43.4, the manufacturing PMI fell unexpectedly from 43.5 in August. The expected reading was 44.0.

With stagnating real incomes, high interest and weak global demand likely to continue to weigh on activity in the coming months, the recession will continue in the fourth quarter, Capital Economics economist Franziska Palmas said.

“The numbers for PMI services in the Eurozone paint a grim picture, but it’s not all doom and gloom,” Hamburg Commercial Bank Chief Economist Cyrus de la Rubia said. The economist expects the currency bloc to contract in the third quarter.

Last week, the European Commission said the 20-nation currency bloc will log a weaker growth as rising consumer prices will weigh on domestic demand amid monetary tightening taking its toll on the economic activity. The EU forecast 0.8 percent growth this year and 1.3 percent in 2024.

While the rate of contraction in services eased slightly, the reduction in manufacturing output was almost unchanged from the previous month, the PMI survey revealed.

New orders were the main factor for the reduction in overall business activity. The fall in September was the most pronounced since November 2020. Demand contracted rapidly in manufacturing, while the acceleration in the service sector was the sharpest since the pandemic.

Backlogs of work decreased as companies often turned to work on outstanding business in order maintain their activity levels.

Confidence in the private sector slipped to the weakest since last November, although, on balance, firms continued to forecast a rise in activity over the year ahead.

Amid the falling confidence, firms were cautious about their hiring activity. The rate of job creation was the joint-second slowest in the current 32-month sequence of growth.

Manufacturers cut their purchasing activity sharply and reduced their holdings of both purchases and finished goods. Due to the falling demand for inputs, vendor lead times shortened for the eight consecutive month.

On the price front, the survey showed that input costs increased at the fastest pace in four months. Inflation was driven by the service sector. Meanwhile, input costs in manufacturing registered a seventh consecutive fall.

By contrast, firms increased their selling prices at a slower pace amid weakening demand. The latest increase was the softest rise since February 2021, the survey showed.

Germany and France, the two largest economies of the euro area, were the key drivers of the downturn during September.

Amid sustained decline in demand for goods and services, business activity in Germany fell for the third straight month. The HCOB flash composite output index climbed to 46.2 in September from August’s 39-month low of 44.6. The reading was seen at 44.8.

Manufacturing continued to lead the decline in September. The factory PMI registered 39.8, up from 39.1 a month ago. At the same time, the services PMI improved to 49.8 from 47.3 in the previous month.

France’s private sector contracted the most in almost three years in September, survey results showed. The flash composite output index hit a 34-month low of 43.5. The score was expected to remain unchanged at 46.0.

At 43.6, the manufacturing PMI reached a 40-month low, and down from 46.0 in August. The services PMI posted 43.9, which was a 34-month low. The score fell from 46.0 in the previous month.

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