The eurozone economy has slowed sharply, according to a closely watched business survey which indicated that a period of recent growth in the services sector is stalling and price pressures are cooling.
The benchmark purchasing managers’ index, a measure of activity in manufacturing and services, fell to a five-month low of 50.3 on Friday’s data, down from 52.8 in the previous month. It was below the 52.5 reading forecast by economists in a Reuters poll.
By dropping towards the 50 mark that separates contraction from expansion, the result dampens hopes of an economic rebound in the 20-country single currency zone after two quarters of mild contraction.
“This is a severe slowdown,” said Carsten Brzeski, an economist at Dutch bank ING. “It shows the ECB forecasts were utterly over-optimistic. We are clearly heading for another weak quarter, with a possible flirtation with recession again.”
The European Central Bank had forecast gross domestic product in the bloc would grow at 0.9 per cent this year despite the past two quarters of 0.1 per cent falls. This was widely seen as too optimistic and economists said the PMI data made it almost certain the forecast would be cut in September.
“These data aren’t pretty,” said Claus Vistesen, an economist at research group Pantheon Macroeconomics, adding that the figures were consistent with eurozone growth remaining “subdued” in the second and third quarters of this year.
The biggest surprise in the HCOB flash eurozone composite PMI data was the sharp slowdown in the services sector, which has been one of the few positive areas of the eurozone economy for much of this year.
The slowdown was especially sharp in France, where activity levels among services companies contracted for the first time since the start of the year. This contrasted with the UK services sector, which slowed less and remained firmly in expansion territory in June.
This could strengthen the case among the more dovish policymakers at the ECB for the central bank to be more cautious about further interest rate rises beyond the one in July they have already signalled is “very likely”.
Investors responded by betting that the ECB would not raise rates by as much as they previously thought. Germany’s two-year government bond yield, which moves inversely to its price, fell 10 basis points to 3.12 per cent. The euro fell almost 1 per cent against the dollar to $1.085.
Price pressures have continued to ease, the survey showed, with input costs for manufacturing companies falling at their fastest rate since July 2009. This suggests the recent decline in eurozone industrial producer prices, which fell 3.2 per cent in the year to April, is likely to continue.
However, what will still worry ECB rate-setters is that input costs continued to rise for services companies at well above the historical average pace, “buoyed in particular by wage pressures”, said S&P, which runs the survey. Workers’ wages in the bloc rose more than 5 per cent in the year to the first quarter, while unemployment fell to a record low of 6.5 per cent in April, which ECB officials fear is likely to keep services inflation high.
Eurozone inflation has fallen from a peak of 10.6 per cent to 6.1 per cent in May and next week new data is expected to show a further decline to 5.7 per cent. But the ECB is likely to focus on the core rate, stripping out energy and food, which is expected to rise from 5.3 per cent in May due to an acceleration of services prices.
Separately, German house prices fell at a record rate of 6.8 per cent in the first quarter of this year, as higher borrowing costs, inflation and weaker economic growth took their toll on Europe’s largest property market.