- The eurozone composite PMI fell further in August, with the services index now joining the manufacturing one into clear contraction territory…
- …but the news is not unequivocally dovish – the PMIs have been too gloomy on growth in the past, while the pricing indices rose on the month
- We expect a 25bp ECB rate rise in September, but downside growth risks pose major questions about the prospect of further tightening beyond that
Facts
The eurozone composite PMI dropped sharply again in August, from 48.6 to 47.0 (consensus 48.5) (Chart 1). That is the fourth consecutive fall in the index to the weakest level since the pandemic-affected print in November 2020, and the reading was substantially weaker than consensus expectations (consensus 48.5). The ‘good’ news was that the manufacturing PMI edged up from 42.7 to 43.7, but that was partly driven by the (often distortionary) ‘supplier delivery times’ index, while the recovery in the orders components was more muted (Chart 2). The big disappointment was in services, which joined manufacturing in contraction territory – the services index dropped from 50.9 to 48.3. However, there were more limited declines in other services components, including employment and business expectations (Chart 3).
Turning to the eurozone pricing indices, the input price indices for both manufacturing and services rose fairly sharply (Chart 4). S&P Global, the survey provider, pointed to the rise in the services input price index being ‘commonly linked to rising wage pressures’. However, the services output price index did edge down very slightly.
The readings from the German PMI survey were even gloomier. The composite index dropped from 48.5 to 44.7, the lowest since May 2020. Like in the eurozone, there was a rise in the manufacturing index from 38.8 to 39.1. But to an even larger extent than in the eurozone, that was driven by a drop in the ‘supplier delivery times’ index which feeds inversely into the PMI numbers. The manufacturing orders situation deteriorated further from already weak levels, despite a slight improvement in export orders. The fall in the services index was huge, however, with a 5-point decline to 47.3. That is the biggest monthly drop since April 2020. In terms of services prices, the input and output price surveys both rose on the back of rising fuel prices and sustained wage pressures, with the output price index the highest since February 2023.
In France, the composite PMI managed to hold steady, though at an already weak 46.6. The manufacturing index rose from 45.1 to 46.4. Again the ‘delivery times’ index played a role, but there was some improvement in the output index. The services index sunk lower, though, declining from 47.1 to 46.7, with falls across the main sub-components including employment and business expectations. However, unlike in the eurozone as a whole, the services input and output price indices edged down.
By our calculations, the composite PMI for the eurozone excluding Germany and France declined from 49.7 to 48.8. The manufacturing PMI edged down from 49.8 to 49.6, while the services index fell from 51.9 to 49.9.
Implications
Clearly, the headline PMIs are softening fast, and they’re consistent with a contraction in eurozone GDP in Q3. By our estimates, assuming the composite PMI remains unchanged in September, it would predict GDP growth of -0.26% q-o-q (S&P Global estimates a -0.2% implied growth rate). That is significantly weaker than our +0.2% forecast (Chart 5).
The big question for us is, should we take that gloomy steer seriously? There are two ways of thinking about this. First, the econometrics – specifically, are the headline PMIs consistently reliable in predicting the growth outlook? Second, the economics – have headwinds facing eurozone activity really intensified enough to trigger a downturn?
On the econometrics, we do find that, in general, the composite PMI is the single best survey for predicting GDP growth (see Surveying the surveys, 4 September 2018). However, it has not been consistently reliable over the last few quarters – it was too gloomy over the second half of last year, but too optimistic in Q1 this year (Chart 5). Also, we find that the composite PMI future output index is very nearly as good a predictor of growth, and it is pointing to a substantially less-weak 0.1% q-o-q growth rate in Q3.
How about the economics? Granted, there are clear demand headwinds facing the economy. Manufacturers are experiencing weak global demand, particularly from mainland China. Meanwhile, services providers might be feeling the petering out of the post-COVID-19 upswing in underlying demand, the headwind to household spending from rising interest rates, and ongoing cost pressures. But on the other hand, the intensity of the cost-of-living squeeze has eased after utility bills shot up last year.
Taken together, on the econometrics and the economics, while the weak headline PMIs do suggest a clear downside risk to eurozone growth, we’re inclined to treat that weakness with a degree of caution.
Our caution about the steer from the composite PMI, and the fact that the pricing indices rose again (partly attributed to wage pressures) means we do not see the news in the August PMIs as unequivocally dovish. In other words, we think the ECB is on course for another 25bp rate rise in September. But bearing in mind downside risks to growth, and our view that inflation pressures will only soften gradually (see Oil to spoil the downtrend, 18 August 2023), we do not expect any further rate hikes beyond that. On the other hand, we do not see any rate cuts through our forecast horizon, which goes out to the end of next year.
1.The eurozone PMI fell further in August, with services following manufacturing into contraction territory
Source: HCOB/S&P Global PMIs, Refinitiv datastream
2.Besides the ‘delivery times’ index, the man manufacturing components were fairly steady, but still very soft
Source: HCOB/S&P Global PMIs, Refinitiv datastream
3.Other services components fell, but a little less sharply than the headline activity index
Source: HCOB/S&P Global PMIs, Refinitiv datastream
4.The input price indices rose for both manufacturing and services
Source: HCOB/S&P Global PMIs, Refinitiv datastream
5. The PMI output indices have been too gloomy on growth before
Source: HCOB/S&P Global PMIs, Refinitiv datastream, HSBC calculations
