All of the economic signals confirm that growth in the eurozone economy is going nowhere.
Any reading above 50 signals growth, and the eurozone’s PMI is rapidly tumbling to that no-growth level.
“Although some growth is better than no growth at all, the braking effect of rising economic and geopolitical uncertainties on manufacturers is becoming more visible,” Markit’s Rob Dobson said. “This is also the case on the demand front, with growth of new orders and new export business both slowing in August.”
“In one line: Alarming signs from the eurozone manufacturing sector,” said Pantheon Macroeconomics’ Claus Vistesen. “The downbeat economic news is intensifying.”
Every Country Stinks
Vistesen pointed to the country-specific PMI reports, which were mostly worse than expected.
Germany, the eurozone’s largest economy, saw its PMI fall to 51.4, which was worse than the 52.0 expected. Italy, the eurozone’s third largest economy, saw its PMI plunge to a 14-month low of 49.8, missing expectations for 51.0.
Any reading below 50 signals contraction.
“Some marginal growth was still recorded on the output front, but the paring back of purchasing activity, inventories and employment would indicate that the recovery in the manufacturing sector has hit a roadblock,” Markit’s Phil Smith said of the Italy PMI report.
Vistesen characterised Italy’s report as “a shocker.”
France, the eurozone’s second largest economy, fell to a 15-month low of 46.9 in August from 47.8 in July. Believe it or not, this print was actually better than the 46.5 expected by economists. However, it remains deep in contractionary territory.
“Sharply falling output led firms to cut back employment, purchasing and stock levels further in August,” Markit’s Jack Kennedy said of the France PMI report. “This sort of across- the-board weakness has been a common theme in recent months and there remains very little to suggest any turnaround in fortunes will be imminent.”
More Stimulus From The ECB?
Eurozone consumer price growth fell to just 0.3% in August. Morgan Stanley’s Joachim Fels characterised this as “dangerously close to the deflation threshold.” Prices in Italy actually fell 0.2%.
This combination of deteriorating prices and stagnating economic activity puts increasing amounts of pressure on the European Central Bank to unleash more monetary stimulus. The next big move would be quantitative easing (QE), which is when a central bank goes buys up bonds in order to boost credit market liquidity and keep interest rates low.
The ECB meets Thursday, and currently economists expect no change in monetary policy.
“So this coming Thursday’s ECB press conference will be the most eagerly anticipated event of the week for financial markets,” Fels said. “As I see it, there is scope for some disappointment though. Broad-based QE, defined as a large-scale asset purchase program including government bonds, remains a measure of last resort that is unlikely to be put in place any time soon because the political and legal hurdles, particularly in Germany, continue to be very high.”
These legal hurdles have been among the hindrances that have prevented the ECB from being as aggressive as the U.S. Federal Reserve. We also can’t forget about the complex politics of the 18-country eurozone.
“Also, the ECB council will likely worry about the moral hazard aspects of QE, which could easily tempt governments in Italy, France and elsewhere to go even slower on reforms,” Fels added.
QE isn’t the only trick the ECB has up its sleeve. It also has room to lower short-term interest rates, which includes a main refinancing rate of 0.15%, a marginal lending facility rate of 0.4%, and a deposit facility rate of -0.1%.
“[I]t is more likely that the ECB will use other means of easing monetary conditions before embarking on QE, including another cut in official rates and a targeted ABS purchase program,” Fels said. “Yet, even on these two measures, it is probably too early to expect concrete action this coming Thursday. My guess: the council will at best pre-announce an ABS purchase program for later this year, with details to be announced at a later stage, and could re-insert a bias for lower rates further down the road in its forward-guidance language.”
The ECB will make its monetary policy announcement on Thursday at 7:45 a.m. ET, which will be followed by a press conference at 8:30 a.m. ET.