Eurozone Growth Stagnates as Service Sector Slows, Manufacturing Gains 3.5-Year High

In August, the Eurozone's economic growth remained sluggish, as indicated by the Purchasing Managers' Index (PMI). Despite an increase in overall new orders for the first time since May 2022, the slowing growth in the service sector offset improvements in manufacturing output, resulting in a modest economic expansion for the month.

The HCOB Eurozone Composite PMI rose slightly to 51.0 in August, up from 50.9 in July, marking a 12-month high but still indicating a modest economic growth. The index's threshold of 50.0 distinguishes between economic expansion and contraction. Domestic demand offset the impact of a decline in export orders, which fell at the fastest pace since March, leading to the first increase in overall new orders since May 2022, albeit at a marginal rate.

Among the major economies in the Eurozone, Spain, despite a slowdown in growth, remained the best performer, followed by Italy, which saw a slight acceleration in economic growth. Germany's economic expansion slowed, while France remained in contraction territory, although its PMI rose to 49.8, the highest level in 12 months.

The chief economist of a commercial bank noted that the Eurozone faces the risk of economic stagnation due to slow growth. Political tensions in France and Spain, uncertainty surrounding the EU-US trade agreement, and ongoing challenges in the key automotive sector are all detrimental to economic growth. The EU and the US reached a framework trade agreement in late July, but only 15% of the baseline tariffs have been implemented so far.

The service sector, which dominates the Eurozone economy, saw growth slow to a minimal level, with the service sector PMI falling from July's four-month high of 51.0 to 50.5 in August. In contrast, the manufacturing sector showed a bright spot, with output achieving the strongest growth in nearly three and a half years, providing a glimmer of hope amidst the overall economic downturn.

Overall employment growth accelerated to its highest level in 14 months, with service sector firms expanding their workforce, while manufacturing firms continued to reduce their headcount. However, price pressures intensified in August, with input costs rising at the fastest pace since March and businesses increasing their product pricing at the largest margin in four months. This could complicate the European Central Bank's inflation outlook.

The overall inflation rate in the Eurozone edged up to 2.1% in August, nearing the European Central Bank's 2% target, which could further reinforce market expectations of stable interest rates in the short term. Business confidence remained virtually unchanged from July and still below the long-term average, indicating that businesses remain cautious about future growth prospects.