(Bloomberg) -- The euro zone’s two largest economies saw private-sector business activity slump in September as Germany’s manufacturing woes worsened and France’s services industry sank.
S&P Global’s flash Purchasing Managers’ Index for Germany fell more than anticipated to 47.2 - the lowest level in seven months and still below the 50 mark that separates growth from contraction. France‘s plunged to 47.4 from 53.1 - far short of the 51.5 that analysts surveyed by Bloomberg had foreseen.
Listen to the Here’s Why podcast on Apple, Spotify or anywhere you listen.
The euro slipped after the data, trading 0.5% at $1.1106. Euro-area government bonds advanced, with the yield on 10-year German notes falling as much as four basis points.
Monday’s data suggest the slowdown in the currency bloc’s 20-nation economy is becoming more pronounced after an early-year rebound fizzled out. Lower interest rates may offer support: The European Central Bank loosened monetary policy for the second time this year in September and is likely to do so again. But many of the problems are structural and require more difficult fixes.
The main weak spot remains Germany, where the Bundesbank has warned that a mild recession is possible following a string of bad news from carmakers. Mercedes-Benz Group AG became the latest to disappoint investors last week - joining BMW in cutting earnings guidance. Volkswagen AG, meanwhile, has warned that weak demand may force it to close factories in its home market.
“Surveyed businesses highlighted increased caution among customers and associated investment reticence, with concerns towards the health of the economy reported to be a factor,” S&P Global said.
Analysts polled by Bloomberg only see Germany resuming growth toward year-end. Dwindling factory output is largely to blame. S&P’s gauge of German manufacturing dropped to a one-year low, while services almost ground to a halt.
“The downturn in the manufacturing sector has deepened again, evaporating any hope for an early recovery,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “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.”
A technical recession “seems to be baked in,” according to De la Rubia.
France suffered a plunge in services activity that had received a surprisingly strong boost from the Paris Olympics. The index fell back to 48.3 from 55. Analysts had predicted a reading of 53.1.
The Bank of France expects the economy to grow 0.8% this year, though it’s been held back by political uncertainty following parliamentary elections. Prime Minister Michel Barnier‘s new government must now rein in a budget deficit that’s shot well beyond the European Union’s 3% ceiling.
“France joins the group of euro-zone economies struggling with significant growth challenges,” said Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank. “This confirms the suspicion that the service-sector surge in August was an Olympics-related anomaly, which has now dissipated.”
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, PMI readings from the UK and the US, due later Monday, are set to be broadly unchanged, remaining firmly in expansion territory.
--With assistance from Joel Rinneby, Mark Evans and Constantine Courcoulas.
(Updates with market reaction in third paragraph.)
©2024 Bloomberg L.P.