Euro zone economy likely contracted this quarter-PMI

The euro zone economy will likely contract in the third quarter and won’t return to growth anytime soon, a survey showed, even though a downturn in the bloc’s business activity eased slightly in September.

HCOB’s flash euro zone Composite Purchasing Managers’ Index (PMI), compiled by S&P Global and seen as a good gauge of overall economic health, rose to 47.1 in September from August’s 33-month low of 46.7.

While that was still below the 50 mark separating growth from contraction it beat expectations in a Reuters poll for a slight dip to 46.5.

“The numbers for PMI services in the euro zone paint a grim picture,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, adding he thought the economy would 0.4% contract this quarter.

“The main drag continues to come from manufacturing where the order situation deteriorated further.”

September’s fall in overall activity came despite firms barely increasing their charges. The composite output prices index dropped to 52.2 from 53.3, its lowest since early 2021.

That drop will likely be welcomed by policymakers at the European Central Bank who last week raised their key interest rate to a record high of 4% in their fight against inflation.

The services PMI rose to 48.4 from 47.9 but spent its second month below the breakeven mark this year. The Reuters poll had predicted a reading of 47.7.

With higher borrowing costs eating into indebted consumers’ disposable income they cut back on spending. The services new business index fell to 46.4 from 46.7 – its lowest since February 2021.

The manufacturing PMI has been sub-50 since mid-2022 and the latest headline index dipped to 43.4 from 43.5, confounding expectations in the Reuters poll for a rise to 44.0.

An index measuring output, which feeds into the composite PMI, held steady at last month’s 43.4.

A chunk of that activity was from factories completing existing orders. The backlogs of work index dropped to 38.1 from 39.8, the lowest reading since the COVID pandemic was cementing its grip on the world in May 2020.