Sharp Contraction in Euro Zone Business Activity Amid Economic Uncertainty

Euro zone business activity contracted significantly this month due to a flatlining services industry and an accelerating manufacturing downturn. The HCOB's preliminary composite PMI fell to 48.9 from 51.0 in August, reflecting broad economic concerns, particularly in Germany and France. Easing price pressures were a rare positive indicator.

Euro zone business activity contracted sharply and unexpectedly this month as the bloc's dominant services industry flatlined while a downturn in manufacturing accelerated, a survey showed on Monday. The downturn appeared broad-based with Germany, Europe's largest economy, seeing its decline deepen while France returned to contraction following August's Olympics boost.

The HCOB's preliminary composite euro zone Purchasing Managers' Index (PMI), compiled by S&P Global, sank to 48.9 this month from August's 51.0, marking a decline below the 50 mark that separates growth from contraction for the first time since February. A Reuters poll had predicted a modest decline to 50.5.

'As the Olympic flame was extinguished, so was euro zone optimism. The August uptick in the PMI was met by a sharp decline in September. This further fuels growth concerns in the bloc as inflation worries fade,' said Bert Colijn, an economist at ING. Overall demand fell at the fastest rate in eight months, with the new business index plunging to 47.2 from 49.1.

The services PMI also sank to 50.5 from 52.9, lower than all expectations in the Reuters poll which had predicted a more modest decline to 52.1. The drop came despite firms increasing charges at a slower rate, as services inflation eased and the output prices index came in at 52.0 versus August's 53.7, its lowest reading since April 2021.

'The one positive development is that price pressures are easing. This will be reassuring for the ECB and perhaps raises the chance that policymakers will cut the deposit rate again in October,' said Andrew Kenningham at Capital Economics.

On September 12, the European Central Bank cut interest rates again and signalled a 'declining path' for borrowing costs in the months ahead as inflation slows and economic growth falters. The ECB should continue cutting interest rates gradually, its chief economist said last week, but may need to accelerate cuts if the economy further deteriorates.

Central banks around the world are easing monetary policy. China's central bank supplied cash to its banking system for the first time in months on Monday, while the U.S. Federal Reserve kicked off an anticipated series of rate cuts last week with a larger-than-usual 50 basis point reduction. Meanwhile, businesses in Britain, outside the EU, also reported a slowdown in growth this month, potentially encouraging the Bank of England to consider cutting interest rates again.

A PMI covering euro zone manufacturing, which has been sub-50 for over two years and was forecast at 45.6, dropped to 44.8 from 45.8. An output index fell to 44.5 from 45.8. Business optimism waned, suggesting purchasing managers do not expect an imminent turnaround, while the factory future output index sank to an 11-month low of 52.0 from 57.5.

(With inputs from agencies.)