News & Analysis

Today’s latest round of eurozone flash PMIs confirmed what market participants had been fearing for some time now; that the eurozone economy was heading into recession in Q3 if it wasn’t already in one.

The flash PMIs for August not only showed that the recession in eurozone manufacturing that has been ongoing since last-summer persisted in the middle of Q3, but was now accompanied by a contraction in services activity. While there are indications that the ECB should remain concerned about inflation persistence given that prices charged and the level of employment increased in the services sector even in the face of deteriorating growth conditions, we believe that it is ultimately a matter of time before weaker growth conditions start to break these dynamics.


  • Composite: 47.0 vs 48.5 expected
  • Manufacturing: 43.7 vs 42.7 expected
  • Services: 48.3 vs 50.5 expected


  • Composite: 44.7 vs 48.3 expected
  • Manufacturing: 39.1 vs 38.8 expected
  • Services: 47.3 vs 51.5 expected


  • Composite: 46.6 vs 47.1 expected
  • Manufacturing: 46.4 vs 45.0 expected
  • Services: 46.7 vs 47.5 expected

With President Lagarde already setting the stage for a pause in September at the July press conference, we think today’s batch of PMIs dashes the prospect of a rate hike and confirms our view that the ECB’s hiking cycle is complete at a deposit rate of 3.75%. However, with the lingering threat of inflation persistence stemming from a record tight labour market, we think it is too soon for the ECB to officially confirm this view. This trade-off is strikingly similar to that faced by the Fed back in June, which led them to pause their hiking cycle to observe more data only to then resume it at the subsequent meeting.

Given the predicament facing the Governing Council, we expect a similar message to be relayed at the ECB’s September meeting, but the outcome of which to have one discernible difference. The ECB faces vastly different growth data to the US and as such concerns over wage and price dynamics are likely to be discounted more heavily by markets.

In response to today’s data, fixed income markets have become more sympathetic with our view on the ECB’s hiking cycle. Swap traders have trimmed the odds of a rate hike on September 14th by over 10 percentage points to just shy of 40%, while the yields across eurozone sovereigns have dropped between 6 and 10 basis points across key tenors.

EURUSD drops to a fresh two-month low as PMIs flash recession  

The PMIs out of France generally set the tone for the eurozone numbers as a whole

Manufacturing output continued to contract, albeit at a slower pace than in July, and the weakness in production was now accompanied by a contraction in services output. However, despite overall demand conditions weakening, employment gradually increased in the services sector, and while there remained significant goods deflation, services firms continued to pass on higher input costs to the final consumer while simultaneously reporting weaker demand. Despite the preliminary signal from the French data that the latest batch of PMIs were to come in weak, markets were hesitant to price in a weaker growth outlook and the impact that would have on the ECB’s upcoming decisions. That was until the German data provided confirmation of these facts.

Data out of the eurozone’s largest economy effectively matched the story from the French data, and if anything struck a more concerning tone.

The manufacturing index fell to a 2-month low of 39.1, but more importantly the output index specifically plumbed a fresh 39-month low of 39.7. In services, a new 9-month low was recorded, with the PMI falling below the breakeven 50 level for the first time this year as firms reported a reluctance amongst clients due to a squeeze on both household and corporate budgets. Leading indicators of growth were also bleak, with new orders across the private sector remaining in contractionary territory for the fourth month now. While the decline in new orders continued to be led by the manufacturing sector, it is notable that new business also fell at its fastest rate since November 2022 in the services sector.

With global growth conditions also cooling, as exemplified by concerns over China’s growth profile of late, it is unsurprising that new export business provided little relief too.

Instead, firms continued to rest on completing backlogs to sustain output, although this too will run dry at some point. Again, similar to France where services hiring persisted, albeit at a rate that slowed considerably, and output prices increased, prices charged by German services providers rose at the fastest rate in five months. While this does provide a concern for the ECB, the totality of the data suggests that weak growth conditions through Q3 and towards year-end should ultimately weigh on labour market dynamics and thus core inflation pressures. Should the ECB opt to hike its policy rate again in September, it would do so sitting deeply behind the curve and may ultimately rue such a decision later down the line.




Simon Harvey, Head of FX Analysis


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