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Flash Eurozone PMI loses ground to hit three-month low in
July
Growth reliant on service sector as manufacturing downturn
deepens
Jobs growth lowest for 34 months
Prices rise at slowest rate since 2016
The eurozone economy relapsed in July, with the PMI giving up
the gains seen in May and June to signal one of the weakest
expansions seen over the past six years amid a deepening
manufacturing downturn. Overall inflows of new work almost
stagnated and business sentiment fell to its lowest since
late-2014, causing companies to take an increasingly cautious
approach to hiring. Selling prices meanwhile came under pressure
amid tough competition and weak demand.
Slower start to third quarter
Having risen in the prior two months, the IHS Markit Eurozone
Composite PMI® fell to 51.5 in July according to the 'flash'
estimate, down from 52.2 in June to register the weakest monthly
expansion of output for three months. Over the past six years, only
four months have seen lower PMI readings.
At this level, the PMI indicates that the pace of GDP growth is
set to weaken from the 0.2% rate indicated for the second quarter
closer to 0.1% in the third quarter.
Deepening factory downturn
The manufacturing sector has become an increasing cause for
concern, reporting the steepest drop in production since April
2013. Geopolitical worries, Brexit, growing trade frictions and the
deteriorating performance of the autos sector in particular have
pushed manufacturing into a deeper downturn. The survey is
indicative of the goods-producing sector contracting at a quarterly
rate of approximately 1%.
Resilient services, for now
The more domestically-focused service sector remained the main
driver of expansion, though even here the rate of growth has slowed
slightly, likely in part due to signs of weaker labour market
trends.
Hiring was close to a three-year low in July, which could feed
through to lower service sector growth in coming months if it
results in weakened consumer confidence.
A big question also remains as to how long the service sector
can sustain strong growth in the absence of an expanding
manufacturing sector. July saw a widening divergence between the
manufacturing and service sectors to the largest since April
2009.
Weaker sentiment
Companies' future expectations of output also worsened, sliding
to the lowest since October 2014. A small rise in sentiment in the
service sector (though still among the gloomiest seen over the past
four years) was countered by a drop in optimism in manufacturing to
the lowest since December 2012.
The survey saw growing concerns about trade wars and weakened
economic growth prospects both locally and globally, as well as
rising geopolitical stress, notably including Brexit.
Lower prices
Inflationary pressures became increasingly subdued amid the
slowdown. Average prices charged for goods and services registered
the smallest increase since November 2016, led by the largest drop
in factory selling prices since April 2016. Service sector charges
meanwhile rose at the second-slowest rate seen over the past 14
months.
Input cost inflation across the two sectors remained unchanged
from June's 33-month low. Input prices fell for a second successive
month in manufacturing but rose at a slightly increased rate in
services. While manufacturing costs were often reported to have
eased on the back of lower global commodity prices as suppliers
offered discounts, service sector costs were often pushed up by
higher wages.
Broad-based subdued business growth
By region, similar modest rates of growth were seen in Germany,
France and the rest of the eurozone as a whole, with manufacturing
acting as an increased drag on output in all cases, notably in
Germany.
Germany has been especially hard hit by the manufacturing and
autos sector downturns, and is at risk of GDP contracting
marginally in the third quarter. France appears more robust, albeit
with growth likely to ease slightly from 0.3% to 0.25% in the third
quarter.
Policy stimulus
With growth slowing, job creation fading and price pressures
having fallen markedly compared to earlier in the year, the survey
will give added impetus to calls for more aggressive stimulus from
the ECB.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
