German business activity contracted at the fastest pace for over three years in August, a preliminary survey showed on Wednesday, deepening a downturn much faster than expected. Euro zone bond yields tumbled, with investors scaling back their expectations for when the European Central Bank might raise rates.
The HCOB German Flash Composite Purchasing Managers’ Index, compiled by S&P Global, fell to 44.7 from July’s 48.5, hitting its lowest since May 2020 and confounding analysts’ expectations for a reading of 48.3. The indicator tracks the services and manufacturing sectors, accounting for over two-thirds of Germany’s economy.
In the manufacturing sector, output dropped at its steepest rate for four months amid an ongoing downturn in new orders. Companies reported that rising interest rates, weak consumer demand, and high energy prices were weighing on the market, with many churning through existing order backlogs to maintain output. Meanwhile, inflationary pressures intensified in the service sector, with firms jacking up prices faster to offset higher operating expenses and pass on costs to customers.
Despite the bleak outlook, companies were still hiring staff steadily, and expectations of future output improved for the first time in over three months. That suggests that the current soft patch is not likely to last long and maybe the start of a recovery rather than a prolonged downturn.
France’s dominant service sector shrank, but not as much as Germany’s. A survey published on Wednesday showed that French industrial production took a record hit in April before the gradual easing of COVID-19 lockdown restrictions.
Across the Eurozone, PMI data was mixed across the Eurozone, but the overall picture was grim. Germany’s manufacturing contraction was the sharpest since January 2021, while the services sector remained in contraction territory. Meanwhile, the EU’s second-largest economy, Italy, saw a pick-up in business activity after an unexpectedly strong rebound in retail sales and industrial production.
Business sentiment and activity recovery are widely expected in the coming months as most countries have reached the peak of active COVID-19 cases and social distancing measures are being eased. This should help support consumer spending and business investment, but the recovery could be more robust and sustainable. A slowdown in China, which has fueled the global economic recovery this year, is expected to weigh on global growth next year and could lead the ECB to lift interest rates. This could exacerbate the bloc’s slowdown, sapping corporate profit margins and increasing borrowing costs. The ECB is due to meet in September to discuss its next move. A rise in monetary policy rates is widely expected at the meeting, but how fast and by how much remains unclear. Investors will look to data later on Thursday for further signs of a recovery in the European economy.
