The recent Olympic Games held in Paris have played a significant role in propelling the expansion of the euro area's private sector economy during the month of August. However, this surge has not been sufficient to prevent a decline in business morale, which has now reached its lowest point for the year 2024.
According to flash data published by S&P Global and Hamburg Commercial Bank, the HCOB Flash Eurozone Composite PMI Output Index saw a rise to a three-month high of 51.2, an increase from the previous month's figure of 50.2, contrary to the consensus estimate which predicted a lower outcome of 50.1. The modest growth within the eurozone's output can largely be credited to an impressive surge in services activity, which recorded the fastest increase in four months.
With a PMI reading of 53.3, the services sector outperformed the July figures and market expectations estimated at 51.9. It is noteworthy that, although the industry boom was a continent-wide phenomenon, France's services sector experienced the most significant improvement since May 2022, suggesting a direct correlation with the heightened activity surrounding the Olympic Games. While initial observations might give the impression of a soothing economic recovery, a deeper analysis of the underlying data indicates potential vulnerabilities that may not be readily apparent.
According to Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, the uplift in economic activities primarily stems from the services sector's impressive performance in France. Specifically, the Business Activity Index observed a substantial increase of nearly five points, likely induced by the excitement linked to the Olympic Games.
Nonetheless, there are growing doubts regarding the sustainability of this momentum in the upcoming months. Concurrently, the overall growth pace for the services sector appears to be decelerating in Germany, with the manufacturing sector across the eurozone experiencing a further downward trend. Compounding these issues is the persistent decline in the manufacturing industry, which continues to exert downward pressure on the private sector's growth within the eurozone.
The manufacturing PMI plummeted to an eight-month low of 45.6, in stark contrast to the prior reading and consensus estimate of 45.8. This marks a continuation of the dwindling new orders for the third consecutive month, thereby prompting a marginal reduction in staffing levels across the eurozone after seven months of uninterrupted growth. As for inflation regarding input costs, there have been signs of relief as the rate has eased to an eight-month low.
The input costs associated with the services sector, a significant focus for the European Central Bank, have diminished to a 40-month low, enhancing the likelihood of an interest rate cut during the forthcoming September meeting. Conversely, private sector enterprises have increased their selling prices at the most rapid rate observed since April, exceeding the average growth rate for this metric. Looking ahead, business confidence appears shaky, having plummeted below the series average to its lowest recorded level for 2024 thus far.
Cyrus de la Rubia cautions that with the temporary boost provided by the Olympic Games beginning to wane and mounting signs of declining confidence across the Eurozone's service industry, it seems increasingly probable that the ongoing struggles within the manufacturing sector will soon begin to burden the services sector as well..