(Bloomberg) -- Germany’s private sector unexpectedly contracted in July as country’s manufacturing malaise worsened — undermining hopes that growth will pick up in the second half of the year.
S&P Global’s Purchasing Manager Index fell to 48.7 from 50.4 in the previous month, back below the 50 threshold signaling growth. That was worse than any of the estimates in a Bloomberg survey.
The indicator had pointed to expansion in Europe’s biggest economy throughout the second quarter, and analysts had expected momentum to improve gradually. The reading adds to signals that the recovery from months of stagnation will prove more difficult than foreseen.
“This looks like a serious problem,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “The weakness in the manufacturing sector appears to be persistent, with a potential rebound not expected until at least the fall of this year.”
The key industrial sector also drove a further weakening of the labor market. While services kept growing, the rate of expansion there decreased and companies also started cutting staff after a six-month period of steady job creation.
The Bundesbank already cautioned this week that second-quarter growth was probably weaker than anticipated after disappointing industry data. It still said momentum should pick up in the three months through September on the back of stronger private consumption, though it cautioned that things will only improve slowly in manufacturing.
De la Rubia blamed an “increasing loss of global market share of German car and machinery producers to competitors in China” as well as much-maligned structural problems like staff shortages, a lack of investments and high energy prices.
France’s economy did better, coming close to stabilizing after contracting in the two previous months. There was significant divergence, however. Services firms were boosted by the Olympic Games kicking off this week, while factory output slumped.
“The French economy seems on track for a recovery in the second half of the year, a recovery led by the service sector,” said Norman Liebke, an economist at Hamburg Commercial Bank. “But both input and output prices remain a challenge for the French economy as inflation rates accelerated.”
The data are among the first that European Central Bank officials are due to analyze over the coming months after leaving interest rates on hold last week. While the central bank acknowledged that growth had weakened, it’s waiting for further confirmation that inflation remains on track to reach the 2% target next year.
Traders added to bets on ECB monetary easing, pricing in 48 basis points of cuts over the rest of 2024 compared to 47 basis points before the data. The euro fell 0.2% to a session low of $1.0833 while German bonds extended a rally, with two-year yields down four basis points to 2.68%.
Numbers for the euro area as a whole are due later on Wednesday. PMI data earlier revealed that Japan’s private sector returned to growth, while Australia and India both continued to expand. Readings later on Wednesday are expected to show US and UK figures well above 50.
PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.
--With assistance from Mark Evans, Joel Rinneby and Greg Ritchie.
(Updates with market reaction in 11th paragraph)
©2024 Bloomberg L.P.
