(Bloomberg) -- The euro area’s private-sector economy shrank for the first time since March, with the end of France’s Olympic boost and a deepening manufacturing downturn heightening concerns that the region’s recovery has run out of steam.
The composite Purchasing Managers’ Index by S&P Global dropped to 48.9 in September from 51 the previous month — below the 50 threshold separating growth from contraction, data Monday showed. Analysts had expected the measure to slip only marginally, to 50.5.
A key segment of the German yield curve normalized after the release as traders bet that the European Central Bank will need to accelerate the pace of interest-rate cuts to underpin the 20-nation economy.
The rate on two-year bunds fell below the 10-year equivalent on Monday, bringing the spread between the two tenors back above zero for the first time since November 2022. The euro also slipped.
Output in the bloc’s 20 nations already began to fade in the second quarter, with consumers still hesitant to open their wallets even as they benefit from cooling inflation and rising wages. Weak foreign demand — especially in China — is also weighing on factories. Troubles at German carmakers like Volkswagen AG underscore the issue.
“The euro zone is heading towards stagnation,” Cyrus de la Rubia, an economist at Hamburg Commercial Bank, said in a statement. “Considering the rapid decline in new orders and the order backlog, it doesn’t take much imagination to foresee a further weakening of the economy.”
Some ECB officials have become more concerned about sluggish momentum, warning that tight monetary policy mustn’t choke the economy for too long. They’ve still signaled that they’ll probably leave interest rates unchanged at their next meeting, having delivered a second cut of the year in September. But some say a drastic economic shift could change their minds.
Money markets are currently betting on 44 basis points of additional easing this year, with a 40% chance of a move in October.
What Bloomberg Economics Says...
“The composite PMI has flagged a deterioration in the economic outlook. In part, that reflects a back-to-reality drop in France after the completion of the Paris Olympic Games. We expect the euro area to grow 0.2% in the third quarter, unchanged from 2Q. For the ECB, a pronounced growth slowdown would be unwelcome. If further evidence of a slowdown builds, that could make the October gathering a live meeting.”
—Jamie Rush, chief European economist. Click here for full REACT
Much of the euro zone’s weakness is due to Germany, whose manufacturers are confronting a mix of sagging global demand, growing competition from China and structural issues at home. The composite PMI for the country fell to 47.2 from 48.4, with factories contracting at a quicker rate and the services sector almost stalling.
“These troubling figures are likely to intensify the ongoing debate in Germany about the risk of deindustrialization and what the government should do about it,” de la Rubia said.
But momentum also slowed in France, where an Olympics-related bounce disappeared quickly and activity in the services sector plunged. The overall gauge of activity signaled another contraction after growth in August.
Beyond the euro area’s two top economies, output continued to increase, but only at the slowest rate since January, S&P Global said. Inflation in the region as a whole eased, with both input and output price pressures softening.
The weaker activity also had an impact on the labor market, where manufacturers reduced staff at the sharpest rate in more than four years. Employment in the services sector continued to rise, but at the slowest pace since August 2023.
“We expect the official employment figures in the euro zone, which have remained stable so far, to worsen in the coming months, though demographic trends should provide more stability than in previous downturns,” de la Rubia said.
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.
Elsewhere, the UK’s composite PMI slipped more than anticipated, but remained firmly in expansion territory. US data are due later Monday, with economists expecting a broadly unchanged reading of 54.3.
--With assistance from Mark Evans, Joel Rinneby and James Hirai.
(Updates with German yield curve in third paragraph.)
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