Eurozone business activity contracts again in August

Eurozone business activity continued to contract in August as growth in the services sector ground to a near-halt, according to a survey released on Tuesday.

The S&P Global flash eurozone composite purchasing managers’ index - which measures activity in the manufacturing and services sectors - fell to an 18-month low of 49.2 in August from 49.9 in July. A reading below 50.0 indicates contraction, while a reading above signals expansion.

The services PMI activity index declined to 50.2 in August from 51.2 in July, hitting a 17-month low. Meanwhile, the manufacturing output PMI ticked up to a two-month high of 46.5 from 46.3.

The survey found that cost-of-living pressures sapped demand in the services sector, leaving activity only just inside growth territory, while manufacturing remained in a downturn midway through the third quarter of the year.

The flash PMI composite output index for Germany fell to 47.6 in August from 48.1 in July, while the same index for France printed at 49.8, down from 51.7 in July.

Andrew Harker, economics director at S&P Global Market Intelligence, said: "Cost of living pressures mean that the recovery in the service sector following the lifting of pandemic restrictions has ebbed away, while manufacturing remained mired in contraction in August, seeing another record accumulation of stocks of finished goods as firms were unable to shift products in a falling demand environment. This glut of inventories suggests little prospect of an improvement in manufacturing production any time soon.

"Declining output is now being seen across a range of sectors, from basic materials and autos firms through to tourism and real estate companies as economic weakness becomes more broad based in nature. The rebuilding of workforces following the pandemic is also losing steam, with firms increasingly reluctant to hire additional staff given falling new orders and relatively weak business sentiment."

Jack Allen-Reynolds, senior Europe economist at Capital Economics, said: "The limited country breakdown suggests that the German economy is performing particularly poorly, as both the services business activity index and the manufacturing output PMI were below 50, leaving the composite index at its lowest since June 2020. In France, the composite PMI edged below 50 for the first time in 18 months.

"Meanwhile, at the eurozone level, both the input and output price PMIs continued their downward trends, reflecting the easing of global supply chain problems. But they are still very high, and with European gas prices surging and measures of domestic price pressures strong, we expect inflation to remain very high.

"All things considered, the PMI surveys are consistent with our view that the European Central Bank will have to press ahead with monetary tightening even as the economy falls into recession."