Euro zone economy likely contracted in Q3 amid waning demand

[October 04, 2023]  By Jonathan Cable

LONDON (Reuters) - The euro zone economy probably shrank last quarter, according to a survey which showed demand fell in September at the fastest pace in almost three years as indebted consumers reined in spending in the face of rising borrowing costs and higher prices.

HCOB's final Composite Purchasing Managers' Index (PMI), compiled by S&P Global and seen as a good gauge of overall economic health, nudged up to 47.2 in September from August's 46.7.

But that was below the 50 mark separating growth from contraction for a fourth consecutive month, albeit just ahead of a preliminary estimate of 47.1.

Wednesday's survey showed the downturn was broad-based as, like in August, output declined in both services and manufacturing.

Meanwhile, retail sales in the euro zone fell much more than expected in August, official data showed, pointing to weaker consumer demand as inflation remains high.

"The drop in retail sales in August and weakness in the final PMIs for September are consistent with our view that the euro zone economy will fall into recession in the second half of 2023," said Franziska Palmas at Capital Economics.

German service sector activity edged up in September but in France the industry shrank at the fastest rate in almost three years as falling new orders and export business weighed on the euro zone's second-biggest economy, sister surveys showed.

Italy's services industry contracted fractionally in September for a second month although Spain's showed some resilience and expanded slightly after dipping in August.

In Britain, outside the European Union, services companies suffered a less severe downturn than first feared, reflecting a surprise fall in inflation and the Bank of England's decision to leave interest rates on hold.

A sign reading "Anti-inflation challenge, second price cut" is seen near shelves at a supermarket in Nice, France, June 15, 2023. REUTERS/Eric Gaillard/files

September's euro zone composite new business index, which monitors overall demand, fell to 44.4 from 44.6 - a low not seen since November 2020 when the world was still getting to grips with the COVID-19 pandemic.

A PMI covering the bloc's dominant services industry remained sub-50 for a second month but did rise to 48.7 from 47.9. The flash estimate was 48.4.

That comes after a sister survey on Monday showed manufacturing activity remained mired in a deep and broad-based downturn last month as demand shrank at a pace rarely surpassed since the data was first collected in 1997.

In one bright spot, services firms increased headcount at a faster pace last month than they did in August. The employment index rose to 51.5 from 50.4.

"There is still a frenzy for workers in the services sector. Indeed, euro zone firms bulked up their teams at a faster pace than in August. That is a head-turner, considering new business is in the doldrums," said Cyrus de la Rubia at Hamburg Commercial Bank.

"One guess could be that with the economic waters getting choppy, people are pushing back to the job hunt, letting companies plug long-lasting staff gaps."

(Reporting by Jonathan Cable; Editing by Hugh Lawson and Toby Chopra)

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