European PMIs for August show a sharp decline

European business activity contracted again during the month of August, reaching its lowest level since November 2020.

The Eurozone Composite PMI, released on Wednesday, fell to 47.0 for August from 48.6 in July. This beat economists’ expectations of a figure of 48.8, according to the Dow Jones Industrial Average.

A reading above 50 indicates expansion in activity, while a reading below 50 indicates contraction. And if pandemic months are excluded, the latest figures indicate the lowest reading since April 2013.

Cyrus de la Robbia, chief economist at Hamburg Commercial Bank, said the services sector in the eurozone was “unfortunately showing signs of decline to keep pace with the weak performance of manufacturing”.

Regarding the split between services and manufacturing, the former fell to a 30-month low of 48.3 and the manufacturing PMI rose slightly from 42.7 in July to 43.7 this month.

“Looking at our GDP PMI numbers [growth] Rubia added that the current expectations lead us to conclude that the euro area will contract by 0.2% in the third quarter.

The eurozone, the area of ​​20 countries sharing the same euro currency, grew 0.3% in the second quarter, after growing 0.1% in the first quarter. This weak growth reflects the effect of higher interest rates, energy prices and lower external demand.

However, it also hides sharp differences within the region. Germany, for example, recorded the deepest contraction in business activity in August.

“The downward pressure on the eurozone economy in August stemmed mainly from the German services sector, which shifted from growing to contracting at an extraordinary pace,” Robbia said, adding that lower production in the manufacturing sector also adds to the argument that Germany has become the “sick man of Europe.”

Recent economic data is driving the discussion about what the European Central Bank might do when it meets next month.

At her meeting in July, European Central Bank President Christine Lagarde said the central bank could either raise interest rates or pause them. Ultimately, the decision will depend on the new data.

“We continue to expect service inflation to moderate enough over the coming months to convince the ECB not to raise interest rates after September,” Melanie Debono, chief European economist at Pantheon Macroeconomics, said in a note to clients. But others do not agree with this view.

“Stagnation in employment combined with lower output leads to lower output per capita. As a result, the ECB may be more reluctant to pause the rate hike cycle in September,” said Rubia.

Analysts polled by Refinitiv indicate that the central bank will likely leave interest rates unchanged next month, as the main interest rate currently stands at 3.75%.