(Bloomberg) -- Euro-area private-sector activity barely grew this month as its top economy unexpectedly slumped.
S&P Global’s composite Purchasing Managers’ Index fell to 50.1 in July, according to data published Wednesday. While that’s above the 50 level that signals growth, it’s the worst reading since February and worse than economists had predicted in a Bloomberg survey, which saw the measure holding steady at last month’s 50.9.
That shortfall can be attributed to Germany, which surprisingly contracted, dropping below the vital threshold for the first time since March. France also failed to grow, though its 49.5 reading outpaced all but one estimate in a survey of 11 economists.
“It feels a bit like it as the euro-zone economy barely moved in July,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “The situation deteriorated significantly in the manufacturing sector and counteracted moderate growth in the services sector.”
Industry has now been in contractionary territory for two years. It hit a seven-month low in July and de la Rubia also highlighted that “it’s unsettling how steadily companies in the manufacturing sector are slashing jobs month by month.”
The data are among the first that European Central Bank officials are due to analyze over the coming months after leaving interest rates on hold last week. While policymakers acknowledged that growth had weakened, they are waiting for further confirmation that inflation remains on track to reach the 2% target next year.
But input prices increased at a faster pace across the economy, according to the PMI data, and output prices fell only fractionally. That hints at persistent challenges in reaching the inflation goal, de la Rubia said.
What Bloomberg Economics Says...
“The euro-area PMI survey for July creates a downside risk to the GDP forecasts of both Bloomberg Economics and the ECB. However, we still think growth will remain buoyant, as the deceleration of inflation revives real incomes.”
—David Powell, senior euro-area economist. Read the full REACT here.
The euro zone’s top two economies have been underperforming the wider region for some time. Services grew in both German and France this month, with the latter getting a boost from the Olympic Games that kick off this week.
Meanwhile, Germany’s manufacturing malaise worsened again and de la Rubia warned that the economy might contract in the third quarter. But not everyone is as downbeat.
“I’d say the Germany economy has found its footing,” Deutsche Bank Chief Financial Officer James von Moltke told Bloomberg Television on Wednesday. “We’re seeing growth now, it’s marginally positive but we think accelerating now in the second half and into ‘25.”
The euro slipped and bonds extended a rally after the PMI data, as traders added to bets on ECB monetary easing. The common currency fell 0.3% to an almost two-week low of $1.0826, while yield on two-year German was down five basis points to 2.66%.
Traders now see around a 92% chance the ECB will deliver two more rate cuts this year, up from 88% before the release.
“ECB speak has increasingly raised concerns over near- and medium-term risks to the growth outlook,” said Andrzej Szczepaniak, a senior European economist at Nomura International Plc. If the data today translate into weaker growth figures, “this could strengthen the resolve for a September rate cut.”
PMI readings earlier revealed that Japan’s private sector returned to growth, while Australia, India and the UK continued to expand. Data later on Wednesday is expected to show US figures well above 50.
PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.
--With assistance from Mark Evans, Joel Rinneby, Constantine Courcoulas and Oliver Crook.
(Updates with BE after seventh paragraph, Deutsche Bank CFO in 10th, market reaction from 11th)
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