Eurozone PMIs: Weak start to Q3 does not bode well for recovery

The eurozone composite PMI for July declined compared to June and is now stagnation territory (at 50.1, down from 50.9 in June). This was an undershoot of consensus expectations. Today’s reading indicates growth of the bloc’s economic activity flatlined moving into Q3. We already anticipate a slowdown in growth in Q2 and Q3 to 0.2% q/q, down from 0.3% in Q1. But today’s PMI readings underline risks to that view are tilted to the downside.

Similar to last months, activity in the eurozone services sector remained firmly in expansionary territory but did slow in pace. Indeed, the services PMI came in at 51.9 (down from 52.8 in June). Demand for services stayed firm in July. This is likely a continuation of the trends we have seen for both business-related services as well as consumer spending-related services helped by real income increases. The contrast with the manufacturing sector is stark. The manufacturing PMI stayed far in contractionary territory at 45.6 (down from 45.8 in June). Weakness in output in the sector and demand, domestic and abroad, particularly in the German manufacturing sector caused this (read more here).

The PMIs disappointing once more, is supportive of our call for a 25bp ECB rate cut in September and a more extensive rate cut cycle than priced in by financial markets (see more here). Furthermore, the PMI subcomponents contained more information of interest to the ECB. The rate of increase in services output prices slowed for the fourth consecutive month, indicating some easing in services inflation. Additionally, private sector weakness is beginning to affect the overall labour market, which deteriorated slightly according to the eurozone composite PMI. Finally, rising manufacturing input prices in the eurozone area confirm that disinflation of industrial goods prices is now fading in the eurozone. Steadily rising container tariffs over the past months are likely one reason manufacturing input prices are rising.

German manufacturing is the odd one out - Looking at the major national indices, the July composite PMIs for France and Germany both stayed below the neutral mark separating expansion from contraction. However where in France a small increase was seen, with the composite PMI rising to 49.5 up from 48.8 in June, the German composite PMI unexpectedly declined to 48.7, down from 50.4 in June. This contributed to the decline in the eurozone aggregate (see above).

In Germany, the composite decline was driven by both manufacturing (at 42.6, down from 43.5 in June) and services (at 52, down from 53.5 in June). Weak demand in the German manufacturing sector is leading to declines in output. Forward looking indicators such as the new order component and new export orders signal a demand impulse is not expected anytime soon. The eurozone economy seems to be struggling to gain any kind of momentum against the background of restrictive monetary and fiscal policy and a still relative sluggish global economy. At the same time, real wage growth is helping to provide a floor on economic activity.