(Bloomberg) -- French services expanded at the fastest pace in more than two years, driving Europe’s second-biggest economy as visitors from around the world flocked to Paris for the Olympic Games.
S&P Global’s Purchasing Managers’ Index for the sector surged to 55 in August from 50.1 in July, far above the 50 threshold that divides growth from contraction and the median estimate of 50.3 in a Bloomberg survey.
A gauge for the private sector as a whole increased sharply as a result, though France’s manufacturing slump continued to worsen, with the PMI undershooting even the most pessimistic estimate in a separate poll.
Much suggests that the Olympic spirit won’t linger in France. While the third quarter may see an acceleration in economic expansion to 0.5%, according to Hamburg Commercial Bank, a broader slowdown across Europe is likely to catch up with firms.
Business expectations and employment growth in services are easing, while backlogs of work have been shrinking for most of the last year. Across the private sector orders are declining, and what’s worse, output prices rose at the fastest pace since the start of 2024.
“August is likely an outlier due to the Olympic Games,” said Norman Liebke, an economist at Hamburg Commercial Bank. “The manufacturing sector continues to struggle, with production declining even more sharply than in July.”
In Germany, Europe’s largest economy, the outlook is distinctly gloomier. At 48.5, a composite PMI remained below economists’ median estimate and signalled contraction for a second month.
The report adds to evidence that the country’s recovery has fizzled out. Gross domestic product unexpectedly contracted by 0.1% in the second quarter, and analysts polled by Bloomberg predict barely any expansion at all over the whole of 2024.
Industry remained the main drag in August: S&P’s manufacturing PMI has been below 50 since July 2022 and the Bundesbank said in its latest monthly report that factory and construction weakness is likely to persist.
In contrast, services have been benefiting from significant increases in wages that are helping consumption. Their growth is fading, though. August saw a third monthly slowdown in S&P’s gauge for that sector.
Germany’s manufacturing struggles are starting to spill over into services, according to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
“It appears that uncertainty around economic policy has put a damper on consumer spending, while the global manufacturing upswing turned sour before German companies could feel the boost,” he said. “The odds of a second straight quarter of negative growth have gone up, meaning we might be back to talking about a recession in Germany soon.”
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 Joel Rinneby and Mark Evans.
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