Euro Area PMIs resume downward trend

The composite Purchasing Managers' Index for the euro area has resumed its downward trend. The index fell from 51.0 to 48.9, thus clearly disappointing expectations. The economists surveyed in advance had expected a minimal decrease (to 50.5). A particularly strong decline is evident in the French composite indicator (from 53.1 to 47.4). After a positive one-time effect from the Summer Olympics, a negative underlying trend is apparently emerging. But sentiment also continued to deteriorate in Germany (from 48.4 to 47.2), causing the Purchasing Managers' Index to fall here for the fourth time in a row.

In the euro area as a whole, sentiment deteriorated across the board in both the services sector (from 52.9 to 50.5) and the manufacturing sector (from 45.8 to 44.8) (Table 1). The indicator for the economy as a whole has even fallen into a range in which the economy has shrunk in the past. After the economy picked up in the first half of the year, the sharp drop in sentiment indicators does not bode well for the third quarter. Apparently, high interest rates are still weighing on investment activity, and private consumption is increasing only moderately at best. Moreover, it is questionable whether exports will again provide a significant boost. Foreign trade had supported the euro area economy particularly in the first half of the year.

A slowdown in economic growth is giving the doves in the ECB Governing Council a boost. While the monetary authorities consider inflation to have been virtually defeated, attention is likely to shift more and more to the weak economy. We expect the ECB to cut interest rates by a further 25 basis points this year.

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