Euroland Activity Contracted More Sharply in September Than August

September 23, 2008

Euroland’s composite PMI reading in September fell after a small rebound and was also below the July reading.  A score above 50 is needed to connote expanding activity, so September’s result implies an intensifying slowdown.  September readings for the total composite PMI, its orders component, both the output and input price components, and for total manufacturing and total services PMI’s are compared below to readings in the prior three months and to those in August 2007 when the global credit crisis first surfaced.

  Sept Aug July June Aug 2007
Composite 47.0 48.2 47.8 49.3 57.4
Orders 45.8 47.0 46.3 48.0 57.2
Prices-O 52.8 54.5 55.8 55.3 53.6
Prices-I 61.4 65.1 68.3 67.6 60.0
Mf’g 45.3 47.6 47.4 49.2 54.3
Services 48.2 48.5 48.3 49.1 58.0


Activity has contracted in each of the past four months in manufacturing and the even more important service sectors.  When negative growth first became apparent, ECB officials anticipated a return to positive growth in 4Q08.  Instead, the momentum of contraction escalated as the third quarter drew to an end.  The deterioration in the overall index is mirrored by a similar worsening of new business (i.e., orders shown in the second row).  The composite PMI is down 10.4 points since the credit crunch began 13 months ago, and orders show a drop of 11.4 points.  A separate statistical release today for core Euroland industrial orders (excluding transportation equipment) indicated a 1.4% decline in July and a net 3-month drop of 3.9% between April and July. Consensus private-sector forecasts are now flagging average 2009 GDP growth in the euro area of less than 1%.

The German manufacturing PMI had a reading in September of 48.1, down from 49.7 in August, 52.6 in June and 56.0 in August 2007.  French exporters have struggled more than their German counterparts from an elevated euro, and it shows in a French manufacturing score of 43.6, down 2.2 points from 45.8 in August and 52.5 in August 2007.

France’s services PMI, on the other hand, bounced above 50 to 50.4 in September, whereas the German services PMI slid 1.7 points to 49.3 and was 10.5 points below its August 2007 level.  Most shocking in the German service-sector figures was a business expectations component of just 38.7, down from 42.8 in August and 52.8 in August 2007.  In the 11-year history of this data series, Germany business expectations had never been as weak as such are now.

Inflationary pressure has eased, no doubt in response to the drop in oil prices early this month.  Both PMI price indices are back near the levels when the credit crunch began but still comfortably above 50.  The verdict remains open on commodities.  While weakening global growth prospects argue for less strain on inflation, enhanced dollar vulnerability because of implications for a bigger U.S. budget deficit and looseer Fed policy of the Treasury bad debt proposals points to firm, if not more elevated, commodity costs.  ECB officials will not relax their guard, especially with Germany’s most powerful union submitting its most aggressive wage demand in sixteen years.  If all this drives the euro back closer to its July peak of $1.6038 peak than its low of $1.3882 on September 12, deflationary and disinflationary forces in the region will be magnified and may in time bring forward the timing of ECB rate reductions.  Whether the euro’s strength is also constrained is harder to tell at this juncture.



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