Economic Health Gauge Shows Contraction

The eurozone economy likely contracted last quarter, according to a survey Wednesday that showed demand fell in September at the fastest pace in almost three years, as indebted consumers reined in spending in the face of rising borrowing costs and higher prices.

Composite Purchasing Managers’ Index (PMI)

HCOB’s final Composite Purchasing Managers’ Index (PMI), compiled by S&P Global and seen as a good gauge of overall economic health, nudged up to 47.2 in September from August’s 46.7.

Continued Contraction

But that was below the 50 mark separating growth from contraction for a fourth consecutive month, albeit just ahead of a preliminary estimate of 47.1.

Broad-Based Downturn

Wednesday’s survey showed the downturn was broad-based as, like in August, output declined in both services and manufacturing.

Retail Sales Decline in Eurozone

Meanwhile, retail sales in the eurozone fell much more than expected in August, official data showed, pointing to weaker consumer demand as inflation remains high.

“The drop in retail sales in August and weakness in the final PMIs for September are consistent with our view that the eurozone economy will fall into recession in the second half of 2023,” said Franziska Palmas at Capital Economics.

Service Sector Activity in Germany and France

German service sector activity edged up in September but in France, the industry shrank at the fastest rate in almost three years as falling new orders and export business weighed on the eurozone’s second-biggest economy, sister surveys showed.

Italy and Spain’s Services Industry

Italy’s services industry contracted fractionally in September for a second month although Spain’s showed some resilience and expanded slightly after dipping in August.

UK’s Services Companies Fare Better

In Britain, outside the European Union, services companies suffered a less severe downturn than first feared, reflecting a surprise fall in inflation and the Bank of England’s (BoE) decision to leave interest rates on hold.

“The HCOB Composite PMI for the eurozone did rebound a bit. However, we can’t jump on the hope train yet. Blame it on new business, which is plummeting especially in Germany and France,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

Decline in Overall Demand

September’s composite new business index, which monitors overall demand, fell to 44.4 from 44.6 – a low not seen since November 2020 when the world was still getting to grips with the COVID-19 pandemic.

Sub-50 Services Industry PMI

A PMI covering the bloc’s dominant services industry remained sub-50 for a second month but did rise to 48.7 from 47.9. The flash estimate was 48.4.

Manufacturing Activity Continues Downturn

That comes after a sister survey on Monday showed manufacturing activity remained mired in a deep and broad-based downturn last month as demand shrank at a pace rarely surpassed since the data was first collected in 1997.

Increase in Employment in Services Sector

In one bright spot, services firms increased headcount at a faster pace last month than they did in August. The employment index rose to 51.5 from 50.4.

“There is still a frenzy for workers in the services sector. Indeed, eurozone firms bulked up their teams at a faster pace than in August. That is a head-turner, considering new business is in the doldrums,” added de la Rubia.

Conclusion

“One guess could be that with the economic waters getting choppy, people are pushing back to the job hunt, letting companies plug long-lasting staff gaps.”