Stay up to date with free updates
Just sign up Eurozone economy myFT Digest – delivered straight to your inbox.
The euro zone economy slowed sharply, driven by weaker-than-expected growth in the services sector and a steeper drop in manufacturing, particularly in Germany, according to results from a closely tracked business survey.
A survey of euro zone purchasing managers showed business activity had all but ground to a halt this month, helping the headline index fall to a five-month low of 50.1, just above the 50 mark that separates growth from contraction.
S&P Global’s results, released on Wednesday, were weaker than expected in a Reuters poll of economists, who had expected a slight increase to 51.1 from 50.9 in the previous month.
Analysts have warned that second-quarter economic data due next week is likely to show slower growth due to trade tensions and political uncertainty.
“The weak figures put a doubt on the notable economic recovery that many forecasters are expecting in the second half of the year,” Vincent Stammer, an economist at German bank Commerzbank, said, adding that the concerns applied particularly to Germany, the European Union’s largest economy.
Detailed PMI results showed a continuing divergence between manufacturing and the larger services sector, with the services sector index falling to 51.9 from 52.8 and the manufacturing index falling to 45.6 from 45.8.
The euro zone economy stagnated for much of last year but turned positive, expanding 0.3 percent in the first quarter as inflation slowed more than wages and household purchasing power rose.
S&P Global said the “economy barely moved in July” as companies in the currency zone reported a second straight month of falling orders, halting recent job gains and sending confidence for the year ahead to its lowest in six months.
“It’s worrying that manufacturing companies are steadily cutting jobs month after month,” said Cyrus de la Rubia, chief economist at Hamburg Merchant Bank. But he said the smaller job losses than the drop in production suggest “there may still be hope for an improvement in the economy.”
When the European Central Bank kept interest rates on hold last week, President Christine Lagarde said “risks to economic growth are tilted to the downside.” She noted that services are “leading the way,” but manufacturing has “faltered in the past few months” and investment “remains weak.”
Standard & Poor’s said pricing pressures on euro zone companies had picked up at the fastest pace in three months, but managers said the pressures had not been fully passed on to customers as overall sales price increases were the slowest since October, reflecting gains in services and a drop in manufacturing.
Economists said the weak growth outlook made it more likely that the ECB would cut interest rates when it next meets in September, but sluggish service-sector inflation due to fast wage growth is likely to remain a concern for policymakers.
“The combination of a weak economy and still-high price pressures [are] “It offers some support to both hawks and doves,” said Franziska Palmas of Capital Economics, “but on balance we still think a September rate cut is likely.”
The outlook in France has brightened, with some service companies reporting a recovery in activity ahead of the Olympics, and there was relief that neither far-right nor far-left parties won a majority in parliamentary elections this month, but the country is struggling to form a government.
France’s PMI rose to 49.5 from 48.2, the highest level in three months, beating economists’ expectations.
The German survey results were notably weaker than expected. The German PMI fell to 48.7, the lowest in four months, from 50.6, signaling a contraction in business activity in the country. German manufacturing production fell at its sharpest rate in nine months.
But a separate survey published Wednesday by GfK and the Nuremberg Institute for Market Decision-Making showed German consumer confidence rose more than expected this month. The two institutes said the Euro 2024 soccer tournament may have boosted consumer confidence by 3.2 points to minus 18.4, beating economists’ expectations of a small increase to minus 21.
