By Jonathan Cable
LONDON (Reuters) -Growth in euro zone business activity stalled this month as a tepid expansion in the bloc’s dominant services industry failed to offset a deeper downturn among manufacturers, a survey showed on Wednesday.
HCOB’s preliminary composite Purchasing Managers’ Index, compiled by S&P Global, dropped to 50.1 this month from June’s 50.9, barely above the 50 mark separating growth from contraction and defying expectations in a Reuters poll for an uptick to 51.1.
“The euro zone’s flash July PMIs corroborate the message sent by other leading indicators that the recovery is faltering. If leading indicators continue to underwhelm, this may result in a downgrade to our GDP growth forecasts,” said Rory Fennessy at Oxford Economics.
The bloc’s economy will average 0.7% growth this year and 1.4% next, according to a Reuters poll earlier this month. The region’s No. 1 economy, Germany, will expand a meagre 0.2% this year and 1.2% in 2025, the poll showed.
Those German numbers could also be revised down as business activity there unexpectedly contracted this month, dragged down by a steep and dramatic fall in manufacturing output, its PMI indicated.
However, German consumer sentiment is set to recover significantly as households’ income expectations hit their highest point in over two years due to slightly lower inflation and noticeable wage increases, a survey published jointly by GfK and the Nuremberg Institute for Market Decisions showed.
Gearing up to host the Olympic Games from July 26, France’s dominant services industry received a boost although the country’s manufacturing sector weakened further.
Outside of the euro zone, British business activity picked up this month, bolstered by the fastest manufacturing growth in two years and the strongest inflow of new orders since April 2023.
The figures may cheer Prime Minister Keir Starmer’s new government – which is targeting faster growth to allow higher public spending – and the Bank of England, as inflation pressures fell to their lowest in more than three years.
OPTIMISM FELL
Expectations about the coming year in the euro zone waned again, suggesting business managers do not expect an imminent turnaround. The composite future output index registered a six-month low of 60.0 compared to June’s 60.8.
A PMI covering the common currency area’s services sector fell to 51.9 this month from 52.8 versus a poll prediction for an increase to 53.0.
Services firms faced a steeper increase in input costs this month but raised their prices charged at a shallower rate. The output prices index eased to 53.2 from 53.5.
That could be welcomed by policymakers at the European Central Bank who left interest rates on hold last week, having lowered them in June, but said September’s decision was “wide open”.
“The (PMI) survey offers little further clarity on the ECB’s move in September, with the combination of a weakening economy and still high price pressures offering some support for both the hawks and the doves on the ECB’s Governing Council,” said Franziska Palmas at Capital Economics.
“On balance though, we still think a cut in September is more likely.”
The ECB will cut its deposit rate twice more this year, in September and December, according to a strong majority of economists in the Reuters poll.
The euro zone manufacturing PMI dipped to a seven-month low of 45.6 from June’s 45.8. An index measuring output dropped to 45.3 from 46.1.
With demand falling at its fastest pace this year, the bloc’s factories reduced headcount at the sharpest rate since December. The employment index fell to 46.8 from 47.5.
(Reporting by Jonathan CableEditing by Christina Fincher and Toby Chopra)
