EUR/USD Drops as Eurozone PMI Hits 48.9, Signaling Escalating Recession Fears

Composite PMI Falls Below Expectations

HCOB’s preliminary composite eurozone PMI, compiled by S&P Global, dropped to 48.9 in September from 51.0 in August. This marked the first contraction since February, with the index falling below the 50-point threshold that separates growth from contraction. Economists had expected the index to only dip to 50.5, according to a Reuters poll.

The unexpected contraction points to weaker demand across the eurozone, with new orders falling at the fastest rate in eight months. The new business index dropped to 47.2 from 49.1, further highlighting the severity of the slowdown. Chief Economist at Hamburg Commercial Bank, Cyrus de la Rubia, commented, “It doesn’t take much imagination to foresee a further weakening of the economy,” given the declining order backlogs and new business figures.

Services Sector Weakens

The services sector, which had been holding up better than manufacturing, also showed signs of strain. The services PMI declined sharply to 50.5 from 52.9, missing forecasts of 52.1. This indicates that the bloc’s largest sector is now close to stagnation. While inflationary pressures in services have eased, with the output prices index falling to 52.0 from 53.7, this has done little to offset the broader downturn.

De la Rubia added, “With the ECB closely watching the persistently high inflation in services, the news that both input and output price inflation has slowed down is certainly welcome.” However, this slowdown in inflation has not been enough to revive business activity.

Manufacturing Continues to Struggle

Manufacturing in the eurozone remains deep in contraction, with the PMI for the sector dropping further to 44.8 from 45.8. The output index also fell to 44.5, underscoring continued challenges for factories. Business optimism within manufacturing hit an 11-month low, with the factory future output index plunging from 57.5 to 52.0, reflecting low expectations for a recovery in the near term.

Germany, the eurozone’s largest economy, continues to bear the brunt of the manufacturing downturn, while France, after a temporary boost from the August Olympics, has slipped back into contraction.