Downturn in Eurozone Economy Extends into Seventh Month

August 28, 2012 /

The Markit Flash Eurozone PMI Composite Output Index – based on around 85% of usual monthly replies – was broadly unchanged at 46.6 in August, from a final reading of 46.5 in July.

The index has now signalled a contraction of the Eurozone private sector for seven successive months. Output declined in both the manufacturing and service sectors, with manufacturers again reporting by far the steeper pace of contraction.

However, while the pace of decline in manufacturing output eased slightly since July, that signalled for services business activity accelerated.

The decline in total activity was widespread across the currency union. Flash readings for France and Germany pointed to contractions, with the rate of
decline easing in France but gathering pace in Germany. There was also a further marked decline in output outside of the big-two economies.

The latest decline in overall output mainly reflected a further marked drop in new orders. Incoming new business fell for the thirteenth consecutive month, although the rate of contraction was less sharp than July (which was the steepest for over three years). Rates of decline slowed at both manufacturers and service providers.

The export performance of manufacturers also remained in the doldrums during August. New export orders (including intra-Eurozone trade) declined for the fourteenth month running, with the rate of reduction the sharpest since last November. This reflected not only the ongoing weaknesses of the Eurozone market, but also a softer rate of global economic expansion.

The ongoing downturn in the Eurozone economy filtered through to the labour market. Staffing levels declined for the eighth consecutive month, with payroll numbers cut at both manufacturers and service providers.

Employment in France declined for the sixth month running – but to a lesser degree than one month earlier – while further job losses were initiated
outside of the big-two nations. Brighter news came from Germany, where workforce numbers edged higher following a slight reduction in July.

In a sign of continuing excess capacity, levels of outstanding business fell for the fourteenth month in a row during August. Backlogs declined in both
the manufacturing and service sectors, although rates of reduction were slower than in July.

Manufacturers also reported another improvement in average supplier lead times, to further highlight the surplus capacity present in the economy.
Service sector costs continued to rise at a solid clip during August, with the rate of inflation edging up to a three-month high.

Rising input prices at service providers were generally linked to increased food, oil and transport costs. Although manufacturers’ average input prices fell for the third month running, the pace of deflation slowed sharply and was the weakest during that period.

The picture regarding average output charges was less of a mixed bag, with price discounting reported by both the manufacturing and service sectors. However, the overall rate of decline was the slowest for three months.

Finally, confidence levels among service providers showed a modest improvement in August. Business optimism rose sharply in France, and recovered some lost ground in the periphery. In contrast, German service providers still expect business activity to be lower in one year’s time.

Rob Dobson, Senior Economist at Markit said: “The August Markit Eurozone Flash PMI reinforces the prevailing view of the economy dropping back into recession during the third quarter of 2012. Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5%-0.6% quarter-on-quarter, so it would take a substantial bounce in September to change this outlook.

“The downturn is still led by the manufacturing sector, despite its pace of contraction easing a little this month. The service sector is also not out the woods, as business activity declined at an accelerated pace.

“The real interest inevitably comes from the national breakdown. Hopes that German economic strength will aid recovery in the broader currency union were
dealt a blow by its rate of economic contraction accelerating, and further signs that its export engine has slammed into reverse gear. France may be
edging closer to stabilisation, while conditions outside of the big-two remain weak overall. This is leading to job losses across much of the region, although Germany did provide some brighter news by bucking this trend and raising payroll numbers.

“On the price front, manufacturers are still benefitting from declining input costs. Alongside further selling price discounts from both manufacturers and service providers alike, this suggests that inflationary pressures will at least remain muted in the near term.”


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