New manufacturing reports out of the eurozone suggest the economy isn’t picking up significantly from the zero-growth experienced in Q2.
The preliminary eurozone composite purchasing managers index (PMI) tumbled to 52.8 in August from 53.8 in July.
While any reading above 50 signals growth, a decline number signals deceleration. Economists were forecasting 53.4 for the month.
“With the PMI Output Index slipping slightly to 52.8, the region remains on course to register growth of only around 0.3%-0.4% in the third quarter, a level that is unlikely to stimulate any real turnaround in the labour market,” wrote Markit’s Rob Dobson. “Even before rising geopolitical headwinds began to buffet the economy, the double-digit unemployment rate prevailing in the eurozone was already excessively high. Signs are that the modest job creation of recent months has stalled in August.”
During the three months ending July, GDP registered 0.0% growth. And hopes for a recovery are quickly fading.
“The PMI surveys for the euro area suggest that the economy may be stagnating again in the third quarter,” wrote Bloomberg economists David Powell and Niraj Shah. “They also continue to point to weak inflationary pressures.”
The services sub-index fell to 53.8 from 54.2, and the manufacturing sub-index fell to 50.8 from 51.8.
“The the real story is the ongoing relative weakness in the industrial sector,” said Pantheon Macroeconomics’ Claus Vistesen. “This rather worrying trend is driven mainly by the slump in France, but the manufacturing sector is also relatively weak in Germany indicating a wide divergence between these two industries in Europe. The services sector accounts for the largest share of the economy, but movements in the manufacturing sector tends to have a better correlation with movements in GDP.”
Germany’s manufacturing PMI fell to 52.0 in August from 52.4. France’s fell to 46.5 from 47.8.
“Our bet is that a big part of the recent indication that the headline eurozone PMI is overestimating growth is probably due to this divergence,” Vistesen said. “We expect Q3 GDP to be better than the poor 0.0% quarter-on-quarter due to a rebound in German growth, but the sequential drop in the manufacturing PMIs, and the fact that the Q3 composite PMI is now lower relative to Q2 has increased risks to the downside.”
All of this puts increasing amounts a of pressure on the European Central Bank to ease monetary policy further in an effort to stimulate growth and stoke inflation.
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