Euro Zone Business Activity Shows Surprising Strength in August

By Jonathan Cable

LONDON (Reuters) – Euro zone business activity exhibited unexpected resilience in August, despite firms raising prices, according to a survey. This development may dampen expectations for two additional rate cuts from the European Central Bank (ECB) this year.

However, indications are that the upswing could be short-lived, primarily driven by a marked increase in French services activity linked to the Olympic Games.

German business activity contracted for a second consecutive month and did so more than anticipated.

“The rise in the flash PMIs for August is not as good as it looks; it was largely due to a boost from the Paris Olympics, and the survey still points to GDP growth slowing in Q3,” said Franziska Palmas at Capital Economics.

“With price pressures still rising, the ECB will remain cautious.”

HCOB’s preliminary composite Purchasing Managers’ Index (PMI), compiled by S&P Global, rose to 51.2 this month from July’s 50.2, moving away from the 50 mark that separates growth from contraction. This contradicted expectations in a Reuters poll for a dip to 50.1 and exceeded the most optimistic forecast of 50.8.

The uptick in activity occurred even as firms across the 20-country currency union raised prices at an accelerating pace, with the composite output prices index climbing to 52.9 from 52.1.

An unexpected rise in July euro zone inflation, along with a robust labor market and steady economic activity, may make ECB policymakers hesitant to ease policy further. After reducing the deposit rate in June, policymakers paused in July, though a recent Reuters poll indicated two additional cuts were expected later this year.

The PMI for Germany, Europe’s largest economy, indicated no improvement as it contracted 0.1% in the second quarter and continued to struggle moving into the second half of the year.

In France, overall growth received a boost from the Olympic Games as a surge in the services sector compensated for ongoing weaknesses in manufacturing.

In the UK, outside the EU, business activity accelerated while cost pressures lessened to their weakest point in over three years, suggesting steady growth momentum toward the second half of 2024.

GOLD FOR SERVICES

The PMI covering the euro zone services industry soared to 53.3 this month from 51.9, surpassing predictions for no change. While some of this activity stemmed from services firms reducing backlogs of work, overall demand also improved. The new business index rose to a three-month high of 51.3 from 50.8.

Conversely, the manufacturing PMI dipped to an eight-month low of 45.6 from July’s 45.8, although an index measuring output inched up to 45.7 from 45.6.

“Another strong month for services helped to outweigh a softening manufacturing sector again,” remarked Matthew Landon of J.P. Morgan Private Bank.

“The ‘Olympics effect’ complicates the task of assessing the underlying strength of the economy, yet the overall data suggests solid but slowing regional growth.”

Optimism among factory managers diminished once again, leading to a reduction in headcount at the fastest rate since November. The manufacturing employment index decreased to 46.6 from 47.0.