New data showing that Purchasing Managers Indices (PMIs) sharply contracted in Germany and France in September are ‘recession red flags’, and indicate a slowing eurozone economy according to analysts.
The HCOB Flash Germany Manufacturing PMI fell for a fourth straight month to 40.3 in September 2024, the lowest in a year, below 42.4 in August and coming in below forecasts of 42.3.
The downturn in the German manufacturing sector has deepened again as production fell the most in 12 months, new orders declined faster, and employment contracted at a rate not seen since the covid pandemic in 2020 as several major automotive suppliers have announced significant job reductions, S&P Global said.
German manufacturers “are downright depressed about their future activity, with expectations for the coming year plummeting. This rapid downturn in sentiment is most likely linked to the wave of negative headlines surrounding Volkswagen, which has cast a shadow over the broader industry”, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said.
Analysts warned that the reduction in overall business activity “was driven by a deepening downturn in the eurozone manufacturing sector, where production decreased for the eighteenth month running and at the fastest pace in the year-to-date”.
The Purchasing Managers Index is an economic indicator based on monthly reports and surveys from private sector manufacturing firms – specifically surveying product managers who purchase the materials needed by a company to manufacture products. The index provide an idea as to what purchasing managers think about the future of their industry. PMIs are also produced for services, and a score of more than 50 indicates an expansion of the sector, while a score of less than 50 indicates a decline. A score of 50 indicates no change from the previous month.
Flash PMIs released for September to date suggest that Germany and France contracted below expectation, raising fears of a hard landing in the eurozone. The final September data are published on 1 October for manufacturing and 3 October for services and composite indicators.
Grim, PMIs down to 47.2 and 47.4 in Germany and France respectively.
— Theo McDonald (@tbald101) September 24, 2024
Anything below 50 is considered a contraction
🇫🇷 🇩🇪 pic.twitter.com/NPBJZWWi81
Althea Spinozzi, the Head of Fixed Income Strategy at Danish Investment Bank Saxo said that the metrics amounted to “Recession Red Flags”.
In Germany, the manufacturing PMI came in below expectations at 40.3, remaining under the 50-mark that separates contraction from expansion, marking its longest period of decline. The services PMI barely held above water at 50.6, slightly above contraction but still weaker than anticipated. This paints a bleak picture for Germany, where the services sector is shrinking for the first time since March.
Meanwhile, France’s services PMI took a sharp dive to 48.3, well below the forecast, driven by weaker demand following the conclusion of Olympic-related activities. The French manufacturing PMI also fell to 44.0, signaling deep contraction in both sectors. The French Composite PMI fell to 47.4, sharply down from 53.1 in August, adding to concerns that France’s economy is faltering faster than expected.
At the Eurozone level, the composite PMI dipped to 48.9, signaling contraction across the board, with only the services PMI showing some resistance at 50.5—just barely above neutral.
Ms Spinozzi added that the data suggested “accelerated economic slowdown”, saying “The latest PMI data reveals sharp contractions in Germany and France, signaling an increasing risk of recession across Europe”.
The figures for September “have further underscored the growing risks of a recession in Europe, with results falling well below expectations. Both Germany and France saw significant contractions in their manufacturing and services sectors, a worrying sign for the broader Eurozone economy,” she said.
Analysts believe that the weak PMIs are symptomatic of a general slowdown in demand – with new orders declining across both services and manufacturing sectors, particularly in exports. High energy costs continue to plague German manufacturers.
Chris Williamson, Chief Business Economist, with S&P Global Market Intelligence, said that “the flash PMI data therefore suggest that the risks of the eurozone economy facing a ‘hard landing’, whereby higher interest rates have only beaten inflation by causing an economic downturn, have risen.
September saw a renewed decline in business activity in the eurozone private sector, according to provisional PMI® survey data,” S&P Global said. “The fall in output was the first in seven months and was registered amid a sustained reduction in new orders. In fact, new business decreased at the sharpest pace since January.
“With new orders and volumes of outstanding business falling at sharper rates and business confidence at a ten-month low, companies scaled back their workforce numbers for the second month running. Meanwhile, demand weakness resulted in slower inflation of both input costs and output prices.”
“The reduction in overall business activity was driven by a deepening downturn in the eurozone manufacturing sector, where production decreased for the eighteenth month running and at the fastest pace in the year-to-date. Although services business activity continued to rise, the latest expansion was only marginal and the weakest since February. After an Olympics-related boost to business activity in August, output in the French private sector returned to contraction in September, joining Germany where the pace of decline in activity was the most pronounced since February. The rest of the euro area saw output rise again at the end of the third quarter, although the pace of expansion was only modest and the softest since January.”
“Steeper reductions in new orders and backlogs of work, plus waning confidence in the outlook led companies to reduce employment again in September, the second month running in which this has been the case. Although modest, the drop in staffing levels was the sharpest since December 2020. Manufacturing workforce numbers were scaled back to the greatest extent in just over four years. Meanwhile, services employment continued to rise, but at the slowest pace since August 2023,” their analysis found.
Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said the eurozone is heading towards stagnation.
“After the Olympic effect had temporarily boosted France, the eurozone heavyweight economy, the Composite PMI fell in September to the largest extent in 15 months. The index has now dipped below the expansionary threshold. Considering the rapid decline in new orders and the order backlog, it doesn’t take much imagination to foresee a further weakening of the economy.”
“Manufacturing is getting messier by the month. The recession has now dragged on for 27 months and even worsened in September. Looking ahead, the sharp drop in new orders and companies’ increasingly bleak outlook for future output suggest that this dry spell is far from over,” he added.
“The manufacturing labour market is feeling the heat. Employers are cutting jobs at the fastest pace since August 2020. At the same time, employment growth in the services sector has slowed for the fourth consecutive month and is now nearly flat.”
“We expect the official employment figures in the eurozone, which have remained stable so far, to worsen in the coming months, though demographic trends should provide more stability than in previous downturns.”
“With the ECB closely watching the persistently high inflation in services, the news that both input and output price inflation has slowed down is certainly welcome. Add to that the deepening recession in manufacturing and the near-stagnation of the services sector, and the possibility of another rate cut in October could very well be on the table, even though this is not the expectation of the market yet”.