Eurozone Economy Slows in September as German Sentiment Cools

Kristian Rouz – Economic growth in the common currency area has slowed in September amid ongoing post-Brexit fatigue, with Germany, the key driver behind the pan-European powerhouse, gradually cooling due to the weaker performance of its services sector.

France has outperformed Germany in terms of economic expansion as manufacturing has proven to be unexpectedly resilient. Unfortunately, this rebound has been insufficient to offset the lingering effects of Europe’s divorce with Britain. Purchasing Managers’ Indices (PMIs) across most sectors undershot earlier predictions, but nonetheless, the overall situation is far from slipping into contraction.

On Friday, the Eurozone’s business growth hit its 20-month lowest, with the flash (preliminary) PMI from Markit Economics having dropped to 52.6 in September from 52.9 in August. The reading of 50 is the borderline between contraction and expansion, but even though the Eurozone remains in positive territory, market expectations for broader economic performance had been higher.

The cooling of the German economy is to blame.

“The upturn in Germany’s private sector economy is losing further momentum, with latest survey data pointing to the slowest expansion in output for nearly one-and-a-half years,” Oliver Kolodseike of IHS Markit said. “With service providers struggling to eke out any meaningful growth … German economic growth has slowed in the third quarter. While further GDP growth is expected, it is highly unlikely that the 0.7% rate seen at the beginning of the year will be repeated.”

Services sectors across the 19-nation common currency area have demonstrated weaker-than-expected dynamics, and the outlook is generally insufficiently optimistic. Manufacturing, on the contrary, has outperformed earlier expectations in September, with robust export orders fueling output and propelling factory gate prices up.

In France alone, PMI advanced to 53.3, while Germany's PMI slid to 52.7, marking the first time in roughly four years that French economic activity turned out to be stronger than that in Germany.

“French private sector output growth strengthened at the end of the third quarter, reaching its joint- fastest pace in over five years,” Jack Kennedy of IHS Markit said. “The data raise hopes of a firmer GDP print for the third quarter after growth ground to a halt in Q2.”

With the Eurozone economy apparently faltering, there is a widely common sentiment that the European Central Bank (ECB) might expand its stimulus program by cutting rates deeper into negative territory, boosting the scale of its bond-buying program (quantitative easing), or introducing targeted money injections that support the real economy (helicopter money).

"We expect it to announce an extension of its asset purchase program in December, if not before," Stephen Brown of Capital Economic said.

The Eurozone's economic growth is expected to total 0.3pc in 3Q16, as employment has slowed since its relatively robust expansion in April.

Economic growth in the Eurozone remains fragile and is still exposed to multiple risks. Additionally, the weakening of the British pound following Brexit has impaired the international competitiveness of German exports in manufactured goods.

Eurozone inflation has remained soft amid still-low food and fuel prices, whilst consumer goods prices have also failed to appreciate despite the abundant supply and cheaper imports. However, inflation is in positive territory, at 0.2pc in August, although the current macro data suggest a great amount of slack in the common currency area's economy.