Euro zone's factory woes hit services growth

PMI shows manufacturing malaise having greater effect on dominant service industry

LONDON • Euro zone business growth hit a wall last month as demand crumbled, according to a survey released yesterday that showed a deepening downturn in manufacturing is increasingly affecting the bloc's dominant service industry.

Last month, the European Central Bank all but promised to ease policy further as the bloc's growth outlook deteriorates and yesterday's survey will do little to sway market expectations for loosening.

IHS Markit's Euro Zone Composite Final Purchasing Managers' Index (PMI), a measure of overall economic health, dropped to 51.5 last month from June's 52.2, moving closer to the 50 mark separating growth from contraction.

"They weren't a massive surprise, the composite PMI was left unrevised. There was no worsening in growth but it remains pretty weak," said Mr Jack Allen-Reynolds at Capital Economics.

Markets ignored the PMI data and instead focused on an escalation of the trade war between the United States and China that drove the yuan to its lowest levels in over a decade yesterday.

The dispute poses the biggest threat to global growth, Reuters polls have found.

In another escalation, China last Friday said it would fight back against US President Donald Trump's abrupt decision to impose 10 per cent tariffs on the remaining US$300 billion (S$415 billion) in Chinese imports.

Those headwinds hurt manufacturers and figures last week showed factory activity contracted last month at its fastest rate in six years.

That factory malaise is now having a greater effect on services and the PMI for the industry fell to 53.2 from 53.6 the month before and below the flash reading of 53.3.

Italy was alone among the bloc's four biggest economies where the PMI rose, offering some hope of a timid recovery there, but activity in Germany's private sector hit its weakest level in more than six years, suggesting Europe's largest economy started the third quarter on a weak footing.

"The economic weakness in the currency union is still concentrated in Germany and Italy. While Italy's PMI edged up in July, it was still very weak and pointing to only a small increase in GDP (gross domestic product)," Mr Allen-Reynolds said.

Growth also slipped in France and Spain. However, in Britain, gearing up to split from the European Union, growth unexpectedly accelerated to a nine-month high last month, possibly soothing some worries about whether the country is slipping into recession before Brexit.

Forward-looking indicators suggested there will not be a turnaround any time soon and demand for services in the euro zone waned, hit by falling new export business - which includes trade between member countries in the bloc. The sub-index dropped to 49.2 from 49.4.

That had an effect on broader optimism and a composite future output index fell to 58.8 from 59.2, its lowest reading since October 2014.

IHS Markit said the PMI indicated third-quarter economic growth of only around 0.1 per cent, slower than the 0.3 per cent predicted in a Reuters poll last month.


A version of this article appeared in the print edition of The Straits Times on August 06, 2019, with the headline 'Euro zone's factory woes hit services growth'. Subscribe