Eurozone Economic Downturn Continues in August

Steven Bobson, Europe & Americas Editor
September 10, 2012 /

Eurozone economic output contracted for the seventh successive month in August. At 46.3, down slightly from 46.5 in July, the Markit Eurozone PMI Composite Output Index came in below its earlier flash estimate of 46.6.

The average index reading so far in Q3 2012 (46.4), is in line with that registered for the second quarter as a whole. The downturn in output was again steeper in the manufacturing sector. Although the rate of contraction in manufacturing production eased to a two-month low, it was still one of the steepest registered since the end of the previous recession in 2009.

Service sector business activity fell for the seventh straight month, and at a slighty faster pace than in July. August data signalled a widespread contraction of economic activity across almost all of the nations
covered by the survey.

The steepest rates of decline were still registered in Spain and Italy, while the modest downturns in Germany and France also continued. Brighter news was signalled for Ireland, with output rising for the third month in a row and at a slightly faster pace than during July.

Rob Dobson, Senior Economist at Markit said: “The final August PMI came in only slightly below its earlier flash estimate, leaving the Eurozone economy on course to fall back into technical recession in the third quarter. Sharp declines in new orders at manufacturers and service providers, plus further job losses, mean that there is little prospect of a sustained improvement in economic conditions over the near-term.

“Some heart can be taken from the recent recovery in Ireland, which is providing hope to others that a return to growth is possible, and further evidence that the downturns in Italy and Spain may at least be easing. The looming concern is the increasing signs of weakness coming out of Germany, the nation others were looking to as a pillar to prop up growth in the broader currency region. With its export engine in reverse gear and domestic demand faltering this is looking less likely as the year progresses. If the core nations falter, the outlook for the periphery will surely worsen.”

August data signalled that the Eurozone economy was still being hit by weaker inflows of new business, leading to rising job losses and the ongoing presence of excess capacity.

Incoming new work fell for the thirteenth consecutive month in August, with the rate of decline the second-fastest during that period. Companies indicated that underlying demand for goods and services was being affected by the ongoing debt and political uncertainty in the Eurozone, and by the onset of softer global
economic growth. The big-four nations all reported reduced inflows of new business, with the steepest rate of decline reported by Germany.

Further job losses were reported in August, as companies reacted to weak demand and lower activity by cutting excess capacity. Payroll numbers have now fallen for eight successive months.

Employment fell in France, Italy and Spain, but only Italy reported a quicker rate of job losses than in the
previous month. Staffing levels were broadly unchanged in Ireland. The German labour market continued to hold up comparatively well, with modest job creation recorded for the third time in the past four months.

Backlogs of work continued to decline despite lower employment. Outstanding business declined for the fourteenth straight month in August, with solid reductions signalled in all of the nations covered by the survey.

Cost pressures rose moderately in August, as an accelerated rate of increase at service providers offset a decline in manufacturers’ average input prices. However, the rate of deflation at manufacturers eased sharply over the month.

Strong competition and weak demand continued to exert downward pressure on average selling prices in August. Output charges declined at manufacturers and service providers alike, with the slightly steeper rate of reduction in the service sector. Selling prices fell across all of the nations covered by the survey.

Spain saw the sharpest reduction, whereas the pace of decline was only negligible in Germany.

The Markit Eurozone Services Business Activity Index edged lower to post 47.2 in August, down from 47.9 in July and below the earlier flash estimate of 47.5. The headline service sector index has now signalled a decline in output for seven successive months.

Business activity fell back into contraction in both Germany and France, while downturns in Italy and Spain remained marked (despite easing slightly over the month). In contrast, output in Ireland rose for the first time in four months.

Underlying the latest contraction in business activity was a further decline in new business. Incoming new work has fallen throughout the past year, with the rate of contraction in August broadly in line with July (when new orders fell at the fastest pace for three years). Only Ireland reported an increase in new business.

Meanwhile, the rate of decline in Germany accelerated to the sharpest since June 2009, and was steeper than the marked rates seen in France, Italy and Spain.

Staffing levels fell for the eighth month running and to the greatest extent since January 2010. Reductions were reported in France, Italy, Spain and Ireland, whereas Germany saw staffing levels rise at the quickest pace for three months.

Spare capacity remained present in the service sector, however, as highlighted by a further marked reduction in backlogs of work. All of the nations covered by the survey reported a decrease. Business confidence about activity levels in one year’s time rose for the first time in five months in August, but remained below its long-run average nonetheless. Confidence improved in all of the nations covered by the survey.

Average input price inflation reached a fourmonth high in August, and was faster than signalled by the earlier flash estimate. However, companies were unable to pass on higher costs to their clients, as average charges fell for the ninth month running. All of the nations covered by the survey reported decreases in selling prices. The steepest cuts were seen in Spain, while the decline in Germany was only marginal.


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