Eurozone business activity unexpectedly contracted in September, signaling deepening troubles in both the services and manufacturing sectors.
The region’s Purchasing Managers’ Index (PMI), compiled by S&P Global, plummeted to 48.9 from 51.0 in August, marking the first contraction since February.
This decline, driven by weak demand and economic challenges in major economies like Germany and France, raises significant concerns about future growth prospects and intensifies speculation regarding potential policy easing by the European Central Bank (ECB).
The PMI’s dip below the critical threshold of 50 highlights deteriorating economic conditions across the eurozone.
The services PMI fell sharply from 52.9 in August to 50.5 in September, while the manufacturing index decreased from 45.8 to 44.8.
Germany’s struggles
Germany, the largest economy in the region, is particularly affected, having contracted by 0.1% in the second quarter and facing further decline in the third quarter.
Economists warn that a technical recession, defined as two consecutive quarters of negative growth, is increasingly likely.
Germany’s struggles reflect a broader trend as France also slips into contraction after a temporary growth spurt driven by the Olympics earlier in the year.
The widespread weakness in the eurozone, combined with easing inflation pressures, paints a picture of a fragile economic landscape for the months ahead.
In the services sector, which had previously shown relative resilience, September’s PMI indicates a significant slowdown, dropping to 50.5, below all forecasts.
Companies are experiencing a sharp decline in new orders, with the new business index falling to 47.2—the fastest contraction rate in eight months.
Although price pressures are easing, analysts suggest that the ECB may need to implement more aggressive interest rate cuts to stimulate demand.
Some predict that further deposit rate reductions could be introduced as soon as October to mitigate the economic downturn.
Manufacturing continues to face challenges
Meanwhile, manufacturing in the eurozone continues to face steep challenges, as evidenced by the PMI’s decline to 44.8, the lowest level since early 2023.
This marks the 26th consecutive month of readings below 50, indicating sustained contraction.
The output index for September fell to 44.5, with business optimism waning significantly as the future output index dropped to an 11-month low of 52.0.
This persistent weakness raises concerns about a potential lack of demand stabilization and the ongoing impact of broader macroeconomic uncertainties on Europe’s factories.
Recent data also indicates a slight easing in eurozone inflation, a critical concern for businesses.
The services output prices index dropped to 52.0, its lowest level since April 2021.
While inflationary pressures persist, this development offers some hope for policymakers, leading many economists to suggest that the ECB might consider rate cuts in October.
Overall, business sentiment across the eurozone remains bleak as September’s PMI data ignites fears that the ECB’s recent measures may not be sufficient to avert a prolonged downturn.
As central banks worldwide adjust their monetary policies, Europe finds itself at a pivotal juncture, with further stimulus likely needed to stabilize growth and restore confidence in the economy.
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