Eurozone August PMI final value slightly revised down, German services sector unexpectedly contracts

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The latest data depicts a complex and fragile picture of the Eurozone economy. The final August Purchasing Managers’ Index (PMI) shows that although overall economic activity in the Eurozone remains slightly expanding, the pace of growth is still slow, and internal performance divergence is intensifying.

According to the final data released by S&P Global on Wednesday, Germany’s August services PMI was revised down to 49.3, not only below the 50 threshold for expansion and contraction, but also lower than the initial value of 50.1 and July’s previous value of 50.6. As the pillar of the German economy, the resilience of the services sector is weaker than previously expected, which is a new setback for Germany, which has been mired in economic difficulties for years.

In contrast, the Eurozone’s overall composite PMI in August edged up to 51.0, revised down by 0.1 percentage point from the initial value, hitting a 12-month high but still only indicating moderate growth. The growth momentum mainly comes from improvements in certain member states and the manufacturing sector, but the slowdown in services and weakness in Germany, the largest economy, highlight the unevenness of the economic recovery.

Intensifying price pressures are another signal not to be ignored. Data show that input costs and output prices faced by Eurozone companies are both accelerating, which could make the inflation outlook for the European Central Bank more complicated. Although the market currently expects interest rates to remain stable, the resurgence of inflation will undoubtedly test policymakers’ resolve.

Mixed Signals: Manufacturing Revives, Services Slow

The Eurozone’s internal sector performance presents a “tale of two cities.” The dominant services sector’s growth slowed to marginal levels, with its PMI falling from July’s four-month high of 51.0 to 50.5 in August. However, the manufacturing PMI released yesterday became a highlight, with output recording the strongest increase in nearly three and a half years.

New orders data also reflect this complexity. Overall new orders grew for the first time since May last year, though slightly, mainly driven by domestic demand, while export orders fell at the fastest pace since March. The job market also saw divergence: service firms continued to add staff, driving overall employment growth to a 14-month high, while factories continued to lay off workers.

Amid sluggish economic growth, inflationary pressures are resurfacing. Data show that input costs for Eurozone companies in August climbed at the fastest rate since March, and companies raised selling prices at the quickest pace in four months.

This trend may further complicate the European Central Bank’s position. Although the Eurozone’s overall inflation rate in August inched up to 2.1%, still close to the ECB’s 2% target, this may reinforce expectations that interest rates will remain unchanged in the short term. However, intensifying underlying price pressures will undoubtedly pose challenges for future monetary policy decisions. Meanwhile, business confidence remained roughly the same as in July and stayed below the long-term average, indicating that firms remain cautious about future growth prospects.

Germany’s Engine Stalls, Services Contract

As the core of the Eurozone economy, Germany’s performance is particularly crucial. The final services PMI for August fell below 50, marking a return to contraction in the sector’s business activity after months of growth. According to Cyrus de la Rubia, an economist at Hamburg Commercial Bank, “economic momentum remains sluggish." He noted, “The German government has clearly not yet succeeded in pulling the economy out of the slow lane.”

The report attributes part of the weakness in services demand to ongoing customer uncertainty. Although Germany’s final composite PMI remained in expansion territory at 50.5, it was also revised downward. However, one survey showed that German business confidence unexpectedly improved to the highest level since 2022, bringing a glimmer of light to an otherwise gloomy outlook.

Overall, the Eurozone’s economy is expanding slowly. Cyrus de la Rubia from Hamburg Commercial Bank warned that riding a bicycle too slowly might result in a fall—this is the risk facing the Eurozone. He believes political tensions in France and Spain, uncertainty surrounding the EU-US trade agreement, and ongoing troubles in the key automotive sector all put pressure on economic prospects.

There are also clear differences among member states. Despite slowing, Spain remains the best-performing major economy; Italy’s growth has accelerated slightly; though France is still in contraction, its PMI has risen to a 12-month high of 49.8; and Germany’s expansion, meanwhile, has slowed significantly.

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