In August, the Eurozone PMI index stood at 45.8 points, marking the third consecutive reading at this level. The 50-point threshold is the dividing line between expansion and contraction in the manufacturing sector and the latest figure suggests a continued substantial contraction in manufacturing activity. The index has remained below 50 points since July 2022.
“Things are going downhill and fast,” commented Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.
“New orders, both domestic and international, are slowing down even more, dashing any short-term hopes for a rebound.”
New orders, including ones from abroad, have decreased at the fastest rate since the beginning of this year. Despite this, production levels have only slightly declined as manufacturers have focused on clearing backlogs. Consequently, the pace of decline in backlogs has been the fastest since February of this year.
The low level of new orders has led to reduced purchasing activity among companies, resulting in decreased inventories of production inputs. The reluctance to invest in new production means, coupled with the use of existing inventories, reflects the broader hesitancy within the sector.
Sentiment among Eurozone manufacturers has fallen to its lowest level in five months.
Rising Inflation Concerns
Although manufacturers’ sales have decreased, the prices for finished goods rose for the first time since April 2023. This was driven by steady increases in operating costs, particularly those related to transportation, due to rising maritime rates affecting the prices of non-EU imports and intermediate goods over the past three months. Dr. de la Rubia highlighted that the price increase is a cause for concern for the European Central Bank, which is striving to control inflation.
Major Economies Acting as Brakes, Not Engines
As in previous months, the Eurozone’s largest economies, Germany and France, have hindered rather than driven the continent’s economic performance. Germany recorded 42.4 points, and France 43.9 points—their weakest PMI readings in five and seven months, respectively. Both countries’ index levels below the 44 points-threshold indicate economic contraction.
Among the countries surveyed, only Greece (52.9 points), Spain (50.5 points), and Ireland (50.4 points) showed industrial expansion. However, it is noteworthy that the pace of expansion in Greece and Spain weakened compared to the previous survey. For Greece, this was the slowest growth in eight months. Italy, close to the 50-point mark with 49.4 points, recorded its best performance in five months.
German Industry Faces Persistent Challenges
Germany’s ongoing struggles are concerning for the wider European context. Despite hopes for a rebound, Germany’s manufacturing sector continues to decline, with the latest August reading dropping to 42.4 points from 43.2 points in July. Although the holiday period may partly influence this result, a score of 42.4 points is alarming for the Eurozone’s largest industrial base.
Similar to the broader Eurozone, Germany’s manufacturing sector is grappling with a lack of new orders, which fell in August at the fastest rate since November 2023. This decline is driven by weak consumer demand and a stagnant construction sector, with export orders also falling significantly.
While production did not decline as sharply as orders, the rate of reduction slowed compared to July, it still experienced the second strongest decline in the past six months. German manufacturers swiftly addressed accumulated production backlogs, achieving the fastest pace in nine months. Meanwhile, purchasing activity was at its lowest in ten months.
Although the prices of final industrial products in Germany have not yet started to rise, as seen in the Eurozone, the trend may soon change. The rate of decline in final prices has been the smallest since the onset of the current sequence of reductions.
Extended Recession in German Manufacturing
The prolonged downturn in Germany’s manufacturing sector is notable, now in its 22nd consecutive month of slowdown—a situation not seen in the past 30 years, where the longest historical recovery took 20 months post-recession. Dr. de la Rubia attributes the protracted slump to intensified competition from China, particularly in Germany’s traditional industries such as automotive and machinery manufacturing. The Chinese competition has significantly reduced the demand for German industrial products worldwide.