Euro zone business growth halts as Germany goes into reverse
Euro zone business growth stalled this month, dragged down by shrinking activity in powerhouse Germany, where a manufacturing recession deepened unexpectedly.
Today’s downbeat survey results come less than two weeks after the European Central Bank pledged indefinite stimulus to revive the 19-country currency bloc’s ailing economy.
IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good guide to economic health, suggested support for stuttering activity is needed.
It sank to 50.4 in September from 51.9 in August and was below all forecasts in a Reuters poll that had predicted a reading of 51.9.
That was just above the 50 mark separating growth from contraction and was its lowest since mid-2013.
The euro zone economy expanded 0.2% in the second quarter, official data showed last month, and the average PMI for this quarter suggests growth could now be weaker.
Analysts said that with the euro zone’s manufacturing sector in the doldrums and services activity starting to lose pace, there is little reason to think that GDP growth will pick up as the ECB and the consensus forecasts assume.
The ECB trimmed its deposit rate further into negative territory on September 12 and promised bond purchases with no end-date to push borrowing costs even lower.
These marked the bank’s last big policy moves under outgoing chief Mario Draghi, who leaves next month.
Earlier figures from Germany, Europe’s largest economy, showed private sector activity shrank for the first time in six and a half years as a manufacturing recession deepened unexpectedly and growth in the service sector lost momentum.
While there are no signs of a turnaround yet, the German Economy Ministry said earlier this month that the country was not facing a bigger downturn or a pronounced recession after contracting slightly in the second quarter.
But several institutes have said the economy would slide into recession this quarter.
In France, the bloc’s second-biggest economy and the only other member for which flash numbers are published, growth slowed unexpectedly.
A flash services PMI for the bloc fell to 52 from 53.5, below all forecasts in a Reuters poll, while a manufacturing index fell to 45.6 from 47, a low not seen since October 2012.
The Reuters poll had predicted 53.3 for services and 47.3 for manufacturing.
Indicating there will not be much improvement soon, a services new business index dropped to 50.9 from 52.3 and a manufacturing new orders index fell to 43.1 from 45.9, a more than seven-year low.
But overall optimism picked up a touch from August’s six-year low. The future output index nudged up to 55.7 from 55.4.
After easing policy this month some economists think the ECB will be forced to go further and Monday’s weak readings will do nothing to dissuade them.
Analysts said the weak data support expectations that the ECB will have to ease monetary policy again in December.
Euro zone inflation remains low
Euro zone inflation remained low at 1% in August, well below the European Central Bank’s target, bolstering market expectations that the bank will further ease monetary policy next month.
The European Union’s statistics office said that inflation in the 19 countries sharing the euro was unchanged from the July reading, in line with expectations in a Reuters poll.
The rates of price increases in July and August are the lowest since November 2016, well below the ECB’s inflation target of below, but close to, 2% despite years of unprecedented monetary stimulus through rate cuts and trillions of euros of bond purchases.
Economists said the latest economic data strengthened the case for further loosening monetary policy.
“There is nothing in today’s data releases to change the minds of ECB policy makers meeting the week after next: we still expect them to cut the deposit rate from -0.4% to -0.5% and to provide further strong hints that more QE is on the way,” Capital Economics’ Andrew Kenningham wrote in a note.
The ECB’s Governing Council holds its next monetary policy meeting on September 12 and has all but promised a stimulus package, with economic growth faltering amid a global trade war and Germany’s manufacturing sector already in recession.
Market expectations are that it will carry out several interest rate cuts in the coming year, along with a fresh round of bond purchases, commonly known as quantitative easing.
The ECB’s measures are also set to include a way to compensate commercial banks for the side effects of negative interest rates.
Core inflation, which strips out volatile unprocessed food and energy and which the ECB scrutinises in policy decisions, was steady at 1.1% in August.
The even narrower measure excluding also alcohol and tobacco prices that many market economists look at was unchanged at 0.9%.
Eurostat’s flash estimate for the month does not include a monthly calculation.
The low overall level of inflation strengthens the case for a package of ECB measures to support the economy and faster inflation.
The ECB’s problem is that inflation has undershot its target since 2013 despite a lengthy economic boom, which saw the creation of over 10 million jobs.
Such an expansion should have fuelled inflation already but hidden slack in the labour market, the growing share of services in the economy and the population’s ageing, all kept a lid on price growth.
While the bank has argued that inflation would eventually come, it has already exhausted much of its fire power and now faces economic turbulence with a relatively depleted arsenal that could force it to once again to reinvent its policy toolkit.
The ECB is also facing the added difficulty that much of the current economic weakness is due to external factors, such as Brexit, a trade war and China’s own slowdown, against which monetary policy is largely ineffective.
While the ECB is unlikely to admit that the current troubles are outside its control, economists say that the best it can hope for is to prop up confidence and preserve already favourable financing conditions.
Separately, the jobless rate in the euro zone was 7.5% in July, unchanged compared to a month earlier, Eurostat data showed.
Eurozone growth halves in second quarter of 2019
Eurozone economic growth halved in the April-June period and inflation slowed sharply in July even though the unemployment rate fell to its lowest in 11 years, data from the European Union’s statistics office has shown.
Eurostat’s preliminary flash estimate of gross domestic product growth in the 19 countries sharing the euro showed the economy expanding 0.2% quarter-on-quarter, down from 0.4% in the previous three months, as expected by economists.
Growth in the euro area therefore returned to the anaemic rates seen in the third and fourth quarters of last year.
Year-on-year, euro zone GDP growth was 1.1%, slowing from 1.2% in the January-March period.
The slower growth was reflected in decelerating consumer price growth; Eurostat’s flash estimate showed year-on-year inflation in July was 1.1%, down from 1.3% in June, as expected by economists.
The headline inflation rate was the lowest reading in 17 months.
The slowing inflation rate is likely to further strengthen market expectations that the European Central Bank, which wants to keep inflation below, but close to 2%, will further loosen monetary policy in September.
Core inflation, which strips out the volatile components of unprocessed food and energy and which the ECB closely looks at in policy decisions, also fell to 1.1% in July from 1.3% in June.
The even more narrow measure excluding also alcohol and tobacco prices that many market economists look at was down to 0.9% from 1.1%.
The slowing price growth comes despite unemployment in the euro zone hitting an 11-year low of 7.5% of the workforce in June, Eurostat data showed.
Germany, Italy drive euro zone economic sentiment down to 3-year low
Euro zone economic sentiment dropped to its lowest point in nearly three years in June as confidence fell markedly in the bloc’s largest economies – Germany and Italy – European Commission data show.
The Commission said that its main indicator of economic confidence dropped to 103.3 points in June from 105.2 a month earlier, reaching its lowest level since August 2016.
June’s large fall capped a quarter in which sentiment dropped in each month, except May, sending another stark warning over the health of the euro zone economy which is grappling with weak growth and low inflation.
The fall was also bigger than market forecasts of a fall to 104.6.
The largest falls in confidence were recorded in Germany, the biggest economy of the bloc, and Italy, its third major economic power, the data showed.
The indicator in Germany fell by 2.9 points, and in Italy by 1.5 points. Confidence decreased also in France, the Netherlands and Spain.
Sentiment in the industry sector plunged by 2.7 points, the largest drop in about eight years, equalled only by a similar fall in April, the Commission said, as the export-driven sector suffers from global trade tensions.
Business managers were also pessimistic about the euro zone’s services sector, which posted a drop of 1.1 points.
Consumer confidence went down by 0.7 points, but did not affect sentiment in the retail trade sector, which instead rose by a point.
In a separate release, the Commission said that its business climate indicator, which helps point to the phase of the business cycle, declined to 0.17 in June from 0.30 in May for its fourth consecutive monthly drop.
Economists polled by Reuters had predicted a more limited fall to 0.23.
Euro zone inflation slowed to one-year low in May, Eurostat confirms
Inflation in the euro zone slowed to 1.2% in May, the lowest rate in more than a year, as price growth in the energy and services sectors slackened.
This is according to the European Union statistics agency, Eurostat, as it confirmed its earlier estimates.
The final data is bad news for the European Central Bank, which targets a rate below but close to 2% and has promised further action if inflation does not pick up.
Eurostat said prices in the 19-country currency bloc went up by 1.2% on the year, slowing from 1.7% in April.
It was the lowest growth rate since April 2018 when inflation was also recorded at 1.2%.
On the month, prices were nearly stable, posting a 0.1% increase that was below market forecasts of a 0.2% rise, new data released today by Eurostat showed.
Prices slowed despite a record increase in euro zone wage costs in the first quarter of the year.
The apparent inconsistency could partly be explained by the fact that higher wage costs for firms do not always translate into more cash for consumers as payroll taxes remain high in the bloc.
The ECB will need to ease policy again, possibly through new rate cuts or asset purchases, if inflation does not head back to its target, ECB President Mario Draghi said earlier today.
Eurostat confirmed that the core inflation measure the ECB looks at in policy decisions, which excludes the volatile components of food and energy, stood at 1% in May compared to 1.4% in April.
A narrower indicator, which also excludes alcohol and tobacco prices, slowed to 0.8% in May from 1.3% in the previous month, confirming earlier estimates.
Inflation was mostly dragged down by energy prices which increased 3.8% in May, after a 5.3% rise in April.
Inflation in the services sector, the largest in the euro zone economy, nearly halved to 1% from 1.9% in April, today’s figures show.
Euro zone April inflation confirmed at 1.7%
Euro zone prices rose by 1.7% in April, EU statistics agency Eurostat confirmed today, while slightly revising upwards its estimates for core inflation.
Eurostat said consumer prices in the 19-nation euro zone were 1.7% higher year-on-year, the same level as the flash estimate published on May 3, and up from 1.4% in March.
The acceleration offers some mild relief to the European Central Bank, which targets inflation of just below 2%, although the jump was likely related to the later timing of Easter this year.
On a Monthly basis, euro zone prices increased by 0.7%, as markets had expected, from 1% in March.
The core indicator watched closely by the ECB for its monetary policy decisions, which excludes volatile energy and food prices, rose to 1.4% in April on the year from 1% in March.
That compared with a flash estimate of 1.3%.
A narrower inflation indicator that excludes energy, food, alcohol and tobacco was also confirmed increasing to 1.3% from 0.8% in March. For this, the flash estimate had been 1.2%.
Inflation as a whole rose because of a 5.3% increase in energy prices, a 1.9% rise in the prices of services and a 1.5% hike of food, alcohol and tobacco prices..
Euro zone inflation accelerates in April on energy, services
Euro zone inflation surged beyond expectations last month, mild relief for the European Central Bank, even if much of the jump was likely related to seasonal effects due to the timing of Easter.
Inflation in the 19 countries sharing the euro accelerated to 1.7% in April from 1.4% a month ago, beating expectations for 1.6%, Eurostat data showed today.
More crucially, underlying prices excluding food and energy, a figure closely watched by the ECB, picked up to 1.3% from 1%.
This saw it erase a worrisome dip a month earlier and hit its highest rate since October on a jump in services costs.
The ECB targets inflation just below 2% but has undershot this for the past six years despite deploying an arsenal of conventional and unconventional tools to boost growth and prices.
But any relief from solid April figures is likely to be short lived as the ECB expects inflation to slowly sink this year and not hit its target over the next three years.
Indeed, the ECB has already announced plans to provide even more stimulus through a new round of ultra cheap loans to banks to help the economy, backtracking on earlier plans to normalise policy after years of extraordinary help.
It now expects interest rates to stay steady through the year but risks are skewed towards an even later lift-off as markets price no hike for the better part of the next two years.
The problem is that growth is faltering, mostly as Germany, the bloc’s powerhouse, struggles through an unexpected dip caused by weak export demand for its manufactured goods.
German growth could fall to just 0.5% this year, the Bundesbank said today, less than half of the euro zone’s rate, and there was no sign yet of a recovery taking hold.
Still, policymakers agree that weakness is merely a dip, not the start of a recession, and a recovery is likely coming in the second half of the year.
Supporting their argument, employment continues to rise and services remain robust, suggesting that weak external demand, partly caused by global trade tensions, were the chief culprit of the slowdown.
Separately, Eurostat said euro zone prices at factory gates eased 0.1% month-on-month in March for a 2.9% year-on-year rise, falling short of market expectations of a 0% monthly reading and a 3% annual gain.
Changes in producer prices are an early indication of trends in consumer prices, as they tend to be passed on by retailers and intermediaries to consumes.
Euro zone factory activity contracted for third month in April – PMI
Euro zone factory activity contracted for a third month in April, hurt by weak global demand, rising trade protectionism and concerns over Britain’s upcoming departure from the European Union.
IHS Markit’s April final manufacturing Purchasing Managers’ Index registered 47.9, beating March’s six-year low of 47.5 and just above a flash estimate of 47.8.
But that was its third month below the 50-mark separating growth from contraction.
An index measuring output change, which feeds into a composite PMI due on Monday that is seen as a good gauge of economic health, also held below break-even. It rose to 48 from 47.2 in March.
“The manufacturing sector remained deep in decline at the start of the second quarter,” said Chris Williamson, chief business economist at IHS Markit.
“The survey’s output index is indicative of factory production falling at a quarterly rate of approximately 1 percent, setting the scene for the goods-producing sector to act as a major drag on the economy in the second quarter,” he added.
The bloc’s economy expanded a slightly better-than-expected 0.4% in the first quarter, rebounding from a slump in the second half of 2018, official figures show.
An April Reuters poll predicted growth would be 0.3% this quarter and as the bloc’s prospects have dimmed, expectations for interest rate hikes from the European Central Bank were also pushed further into next year.
Although rising from recent lows, the new orders index still showed a seventh month of decline in a row.
Stocks of raw materials were run down, backlogs of work were completed at a pace not seen in over six years and headcount was barely increased.
So while optimism picked up a touch in April – the future output index rose to 55.7 from 55.5 – it remained weak compared with historical levels.
“Some encouragement can be gained from the PMIs having risen in all four largest euro member states in April, and forward-looking indicators such as future expectations, new order inflows and the orders-to-inventory ratio having all come off their lows,” Williamson said.
“But it remains too early to call a turning point,” he added.
Euro zone businesses started second quarter with tepid growth – PMI
Euro zone businesses started the second quarter on the back foot, with growth unexpectedly slowing again as demand barely rose despite more modest price rises, surveys showed today.
The data comes a week after European Central Bank President Mario Draghi raised the prospect of more support for the struggling euro zone economy if its slowdown persists.
IHS Markit’s Flash Composite Purchasing Managers’ Index, which is considered a good guide to economic health, fell to 51.3 this month from a final March reading of 51.6.
The reading confounded the median expectation in a Reuters poll for a rise to 51.8.
“It’s still not in recession territory by any means but is pointing to rather subdued and uninspiring economic growth, and this is reflected in the gloomy expectations,” said Chris Williamson, chief business economist at IHS Markit.
Williamson said the PMIs, if maintained, indicated second-quarter GDP growth of just under 0.2%, below the 0.3% predicted in a Reuters poll earlier this month.
As new business barely increased in April – the sub-index only nudged up to 50.6 from 50.5, perilously close to the 50 mark dividing growth from contraction – there is scant sign of an imminent turnaround.
The downturn was again led by the bloc’s manufacturing industry.
While its PMI rose to 47.8 from March’s 47.5, it spent its third consecutive month below the break-even mark and was below a median forecast for 47.9.
An index measuring output, which feeds into the composite PMI, rose to 48.1 from 47.2 but for an eighth month factories ran down old orders to keep active.
The backlogs of work index fell to a more than six-year low of 44.4 from 45.
A PMI covering the bloc’s dominant service industry fell further than expected. It dropped to 52.5 from March’s 53.3, well below the median forecast in a Reuters poll for 53.2.
“We have further signs of a manufacturing-led slowdown spreading to services,” Williamson said.
Like their manufacturing counterparts with no meaningful increase in new business, service firms turned to filling old orders.
And suggesting they see little improvement in activity over the coming year, optimism waned. The business expectations index for services fell to 62 from 62.3 the previous month.
Euro zone banks toughen requirements for mortgage borrowers
Euro zone banks are toughening their requirements of prospective mortgage borrowers, a European Central Bank survey published today showed.
Despite this demand for home purchase loans continued to swell in early 2019.
Credit standards – the boxes house-hunters have to check to receive a mortgage – tightened by 3% between January and March, lenders told the Frankfurt institution.
Meanwhile “net demand for housing loans continued to increase in the first quarter… driven mainly by the low general level of interest rates,” the ECB added.
Although demand for other forms of consumer borrowing also grew, companies’ appetite for credit was only “stable” compared with the previous quarter, marking time after continuous increases since early 2015.
January’s round of the quarterly poll of almost 150 banks had forecast a slowdown in demand for loans, as weaker economic indicators pointed to slowing growth in the 19-nation euro zone.
In the event, ‘hard’ data and ‘soft’ pointers from surveys have both confirmed that the weaker expansion seen in late 2018 has persisted into the new year.
The ECB last month lowered its annual growth forecast for 2019 by 0.6 points, to 1.1% – following in the footsteps of organisations like the International Monetary Fund.
It blamed a familiar litany of culprits including uncertainty over Brexit and trade spats between the US, China and the European Union.
Frankfurt policymakers see the soft patch lasting until around the middle of the year before a resurgence in the second half, ECB Vice-President Luis de Guindos told European Parliament lawmakers last week.
Meanwhile Portuguese finance minister Mario Centeno – who leads regular “Eurogroup” meetings of treasury bosses from the single currency area – last week said a Brexit deal and trade truces between Washington, Beijing and Brussels could help lift the clouds.
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