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The euro zone economy slowed sharply due to weaker-than-expected growth in the services sector and a sharp slowdown in manufacturing, especially in Germany, a closely watched business survey showed.
A poll of euro zone purchasing managers suggested business activity nearly ground to a halt this month, as the composite index fell to a five-month low of 50.1, just above the 50 mark that separates growth from contraction.
The results published by S&P Global on Wednesday were weaker than forecast by a Reuters poll of economists, who had expected a slight rise from 50.9 last month to 51.1.
Analysts warn that trade tensions and political uncertainty will likely lead to a slowdown in second-quarter growth when the data is released next week.
“The weak figures raise questions about the economic recovery that many forecasters had hoped for in the second half of the year,” said Vincent Stamer, an economist at German bank Commerzbank, adding that the concerns were particularly pronounced in Germany, the bloc’s largest economy.
The detailed PMI results showed a continued divergence between the manufacturing and larger services sectors. The services sector reading fell from 52.8 to 51.9, while the manufacturing index fell from 45.8 to 45.6.
The euro zone economy stagnated for most of last year but returned to growth in the first quarter, expanding 0.3 percent, as inflation slowed more than wages boosted household purchasing power.
S&P Global said “the economy barely moved in July” as businesses in the currency bloc reported a second straight month of falling orders, causing them to halt recent growth in hiring and dragging confidence in the coming year to a six-month low.
“It’s very disturbing to see how companies in the manufacturing sector continue to cut jobs month after month,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. However, he said that the smaller drop in jobs than production indicated “there is still hope for a better future.”
When the European Central Bank left interest rates unchanged last week, President Christine Lagarde said “risks to economic growth are tilted to the downside,” noting that the services sector was “leading the way” but that manufacturing had “decelerated in recent months” and investment also “remains weak.”
Price pressures on euro zone companies rose at the fastest pace in three months, S&P found. But managers said the pressure was not entirely passed on to customers as overall selling prices rose at the slowest pace since October, reflecting an increase in services and a decline in manufacturing.
Economists say the weaker growth outlook makes it more likely that the ECB will cut interest rates at its next meeting in September. However, high inflation in the services sector caused by rapid wage growth is likely to remain a concern for policymakers.
“The combination of a weakening economy and still high price pressures [are] “providing support for both the pessimists and the bulls,” said Franziska Palmas of Capital Economics. “Overall, however, we still think a September rate cut is more likely.”
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The outlook is improving in France, where some service firms reported a pick-up in activity ahead of the Olympics. There is also relief that this month’s parliamentary elections did not give a majority to either the right or left, although it did leave the country struggling to form a government.
French PMI rose from 48.2 to a three-month high of 49.5, above economists’ forecasts.
The survey results for Germany were much weaker than expected. The German PMI fell from 50.6 to a four-month low of 48.7, indicating a contraction in business activity in the country. German factory output fell at the fastest rate in nine months.
However, German consumer confidence rose more than expected this month, according to separate survey results published Wednesday by GfK and the Nuremberg Institute for Market Decisions. They said the Euro 2024 soccer tournament may have helped lift consumer sentiment by 3.2 points to minus 18.4, beating economists’ projections for a smaller increase to minus 21.
