Eurozone: Declining PMI reveals weakness in domestic demand - ING

Bert Colijn, Senior Economist at ING, notes that the Eurozone PMI declined from 52.9 to 52.6 as service sector activity fell to a 21-month low.

Key Quotes

“The manufacturing sector PMI improved in September though, as businesses indicated that new orders and exports are strengthening. This comes on the back of initial weakness for Eurozone industry in the third quarter. While in France manufacturing stagnated, German industry saw a marked improvement with notable increases in new orders from the US and Asian markets. This shows that more stable growth in the US and Asia could support weak Eurozone manufacturing production in the second half of the year. With many other trading partners still surrounded by an uncertain political and economic environment, it seems unlikely that a strong revival is in the making though.

The decline in the service sector PMI was mainly because of a weakening outlook, whereas current order books remained stable in September. The past months have seen a decrease in service sector activity according to the PMI, but it is mainly the expectations component driving this. Especially the slowdown in employment growth is concerning. As job creation in the service sector slowed again in September, the tailwind that the decline in unemployment provided seems to be declining. This will likely mean that continued sluggish growth of 0.3% QoQ will prevail for the third quarter, with risks of some further slowing for the end of the year.

Businesses did increase their selling prices for the first time in 13 months, albeit very cautiously. As input prices have been rising recently, it seems logical that these cost increases will be passed onto the consumer at some point. It does seem to be a very tentative hint at rising inflation though, meaning that it can still be a while to come before meaningful price growth will return.”