(Bloomberg) — The euro area’s private-sector economy shrank for the first time since March, with a deepening manufacturing downturn heightening concerns that the region’s recovery has run out of steam.
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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. Analysts had expected the measure to slip only marginally, to 50.5.
The euro slipped after earlier PMI data covering Germany and France, 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.
“The euro zone is heading towards stagnation,” Cyrus de la Rubia, an economist at Hamburg Commercial Bank, said Monday in a statement. “The index has now dipped below the expansionary threshold. 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.”
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.
Some European Central Bank 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.
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.417171163
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 signalled 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, 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 Mark Evans and Joel Rinneby.
(Updates with markets in third paragraph.)
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