Euro Zone Business Activity Stalls as Manufacturing Slump Persists
Euro zone's economic growth halts in July, with services sector slowing and manufacturing declining further. PMI data shows business expectations at a six-month low, potentially influencing ECB's September decision.
The euro zone's economic momentum has come to a standstill in July 2024, as revealed by the latest Purchasing Managers' Index (PMI) data. The HCOB composite PMI, compiled by S&P Global, dropped to 50.1 from June's 50.9, barely above the crucial 50-point threshold that separates growth from contraction.
This economic indicator, derived from monthly surveys of private sector companies, has defied analysts' expectations of an uptick to 51.1. The stagnation in business activity is primarily attributed to a deepening downturn in the manufacturing sector, which accounts for approximately 15% of the euro zone's GDP.
The services industry, contributing about 70% to the bloc's economic output, showed only tepid expansion. The services PMI fell to 51.9 from 52.8 in June, falling short of the anticipated increase to 53.0. Despite facing steeper input costs, service providers raised their prices at a slower rate, with the output prices index easing to 53.2 from 53.5.
In the manufacturing sector, the situation appears more challenging. The manufacturing PMI dipped to a seven-month low of 45.6, down from June's 45.8. The output index within manufacturing declined further to 45.3 from 46.1. Notably, with demand falling at its fastest pace this year, factories have reduced their workforce at the sharpest rate since December 2023.
Business expectations for the coming year have also waned, with the composite future output index registering a six-month low of 60.0, down from June's 60.8. This decline suggests that business managers do not anticipate an imminent turnaround in economic conditions.
These economic indicators could play a crucial role in shaping the European Central Bank's (ECB) monetary policy decisions. The ECB, responsible for maintaining price stability in the euro area, left interest rates unchanged last week, following a reduction in June 2024. However, the central bank has indicated that its September decision remains "wide open."
The euro zone, a monetary union of 20 European Union member states using the euro as their primary currency, faces ongoing challenges in balancing growth across its diverse economies. As the bloc navigates these economic headwinds, policymakers will likely scrutinize incoming data closely to determine the appropriate course of action for supporting the region's economic recovery.
