The Eurozone PMI index, which measures economic activity, rose in August, catching analysts by surprise.
Not all (recent) news about the European economy is bad. Economic activity in the Eurozone rebounded in August, indicating that at least it is no longer deteriorating as a whole. The same indicator for Germany was also above expectations.
The Eurozone Composite PMI Index – which measures developments in industry and services – rose from 51.5 points in July to 51.8 points in August, according to preliminary data released Thursday, 22. August by IHS consultant Markit. Despite this improvement, there is no clear acceleration of economic growth in the Eurozone.
The surprise for the positive remains in the dynamism of services while the industry remains constrained by disruptions in world trade, notably the US-China trade dispute. Nevertheless, in France, the industry grew again. In Germany, however, the decline continues, with orders falling the most in over six years.
“The lack of a speedy recovery from the recent economic downturn has impacted corporate confidence with sentiment at lows of more than six years,” said Andrew Harker, associate director of IHS Markit, noting that third-quarter chain growth should be between 0.1% and 0.2%.
In the second quarter, Eurozone GDP grew by 0.2% on a quarter-on-quarter basis, compared to growth in the first quarter. During this period, the German economy, which is the largest in the Eurozone, even contracted, sounding alarms, while the Italian economy stagnated.
Should the German GDP contract further in the third quarter, Germany will enter a technical recession (defined by two consecutive quarters of contraction). For IHS Markit, this risk is real.
According to the consultant, more German companies are currently expecting a fall in GDP than an increase in the next 12 months. This is the first time since 2014.
“It seems that companies are poised for a continued period of weakness and as a result are showing great reluctance to hire more people,” explains Andrew Harker.
This is more data than the governors of the central banks of the Eurozone meeting on the Governing Council of the European Central Bank (ECB) on 12 September will have to take into account when deciding the next steps of monetary policy. At this time, there is a strong expectation that there will be a strong response if the ECB’s projections, which will be updated at that meeting, show a deterioration of the economic outlook.
But these numbers, particularly those in Germany, are also a wake-up call for the German Government, which has already admitted to moving forward with a stimulus plan. Berlin may have to act earlier than expected if it wants to avoid a recession on its national territory, which would have significant impacts on the Eurozone as a whole.