Data coming out of Europe shows that business activity this month has contracted to its lowest level since November 2020.
In the Eurozone – the parts of the continent that currently use the euro as its main legal currency – the HCOB Flash Eurozone composite purchasing managers' index (PMI) fell to 47.0 in August from 48.6 in July, its weakest level in 33 months. A PMI is a comprehensive index attempting to measure the prevailing direction of economic trends in certain economic sectors. The quoted flash composite PMI is focused on the eurozone's manufacturing and services sectors. (Related: Conservative German party brands EU a "failed project," calls for its complete overhaul as a federation of autonomous nations.)
A reading of 50 or above would have marked an expansion in economic activity, while a reading below last month's 48.6 would have signaled a contraction in the continent's economy. Some economists were hoping for a very modest increase to 48.8 for August.
The recent PMI would be the lowest reading since April 2013 if the Wuhan coronavirus (COVID-19) pandemic months were excluded.
Cyrus de la Rubia, chief economist for the Hamburg Commercial Bank in northern Germany, said the eurozone's service sector is "unfortunately showing signs of turning down to match the poor performance of manufacturing."
The services PMI dropped to a 30-month low at 48.3, while the manufacturing PMI only rose slightly from 42.7 in July to 43.7 in August – nowhere near enough to prevent the eurozone from entering a recession.
"Considering the PMI figures in our GDP [growth] nowcast leads us to the conclusion that the eurozone will shrink by 0.2 percent in the third quarter," predicted de la Rubia.
"The downward pressure on the economy of the eurozone in August stems mainly from the German service sector, which switched from growth to contraction at an unusual pace," de la Rubia added, noting that reduced output in German manufacturing also added to arguments that the country is becoming "the sick man of Europe."
Euro, British pound falling in value
Following the release of the eurozone composite PMI, the euro responded by losing approximately 0.3 percent of its value compared to the United States dollar, trading at a low of $1.0809. Across the English Channel, the United Kingdom pound similarly experienced a dip, falling by 0.8 percent in value to $1.2636. These values represent a more than one-month low for the euro and a two-month low for the pound.
Furthermore, the worse-than-expected readings have made financial analysts predict that both the Bank of England and the European Central Bank (ECB) may respond with less aggressive interest rate increases.
"The continuing sharp drop in the PMI data will test the ECB's growth optimism," said Mark Wall, chief European economist at Deutsche Bank. "Ongoing manufacturing weakness might be more than just cyclical. It could reveal a more persistent and structural competitive shock."
"The weakening in services might reveal that monetary transmission is stronger than the hawks were expecting," he continued. "We are expecting the ECB to pause [rate increases] in September, but it is not clear that inflation is where the ECB wants it yet. A pause should not be misinterpreted as the peak."
Back in July, ECB President Christine Lagarde herself noted that, for August, the central bank would either raise rates or pause rate hikes. No discussions were done considering decreasing interest rates.
"We continue to expect services inflation to ease enough over the coming months to convince the ECB to not hike past September," said Melanie Debono, senior Europe economist for economic research firm Pantheon Macroeconomics.
"Stagnating employment combined with decreasing production and results therefore in lower output per head," said de la Rubia. "As a result, the ECB may be more reluctant to pause the hiking cycle in September."
Current predictions suggest that ECB rates will remain unchanged next month at 3.75 percent.
Learn more about the rapidly deteriorating state of the global economy at EconomicRiot.com.
Watch this video discussing how at least four European countries – Estonia, Germany, Hungary and the Netherlands – are already in a recession and at least 24 more are on the verge of it.
This video is from the channel MEGA (Make Earth Great Again) on Brighteon.com.
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