The decline in business activity does not bode well for growth and leaves central banks in a difficult position.
23 August 2023
German and French purchasing managers’ indices (PMI) for the service sector disappointed to the downside this morning. Both countries reported lower than forecast data below 50 indicating a contraction in business activity. This led to the broader decline in PMI across the euro region with the number for services falling to 48.3 against a forecast expansion to 50.6. This is the first time services activity has declined since the end of 2022 and augers poorly for euro area growth this current quarter. Declining business activity is not a required ingredient for rate hikes to continue but then again price input pressures remain resilient, so the European Central Bank (ECB) once again finds itself between a rock and a hard place.
Following on from the poor PMI numbers in Europe, the UK finds itself in a similar predicament. UK Manufacturing PMI fell more than forecast to 42.5 (expected to fall to 45.1 from 45.3 the month earlier) – so a sore miss. Services similarly slumped into contraction, with a reading of 48.7 (against expectations of an expansionary 50.9). It puts a dampener on rate hike expectations with the gilt market falling in yield across the curve. Recessionary odds remain elevated in the UK, much like the eurozone.
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