Sentiment in the euro zone manufacturing sector eased further in August as the manufacturing PMI dropped for a fourth consecutive month, based on 85% of the monthly replies. Euro zone manufacturing PMI fell from 50.4 to 49.7, slightly less than expected, but still the lowest level in almost two years. National data from the two biggest economies show a mixed picture as manufacturing PMI fell sharply in France (49.3 from 50.5), while the index stayed unchanged at 52.0 in Germany. Growth in the services sector stayed broadly unchanged from the previous month, as euro zone services PMI fell only marginally (from 51.6 to 51.5). In Germany, services PMI dropped sharply (from 52.9 to 50.4) to levels close to the 50-level, while services PMI rebounded from 54.2 to 56.1 in France. New orders dropped marginally, contracting for the first time in two years, which suggests that activity is likely to slow further in the coming months. Employment continued to grow, while upward price pressures eased sharply. Input price inflation eased to an 18-month low, while output price inflation slowed to a 9-month low. These indicators are important forward looking inflation measures, suggesting that inflation will slow significantly in the coming months, which won’t go unnoticed within the ECB and might soften the central bank’s tone on inflation in the coming months. The upward surprise in the headline figure indicates that the slowdown in EMU growth is less dramatic than some had feared, but they suggest that growth could slow further after already a disappointing second quarter, to near stabilization levels.
In August, the German ZEW economic sentiment indicator posted its biggest drop since 2006. The headline expectations index fell from -15.1 to -37.6, while the consensus was looking for a decline to -26.0. The plunge in the current situation index was even bigger, from a near record high level of 90.6 to 53.5. The exceptionally sharp decline was probably partly due to the debt crisis in both the euro zone and US and disappointing German growth figures, which pushed equity markets sharply lower in August.
According to the first estimate, European Commission’s consumer confidence weakened sharply in August, falling back to the lowest level since June last year. Economic confidence dropped from -11.2 to -16.6, while only a slight deterioration was expected ( to -12.4). The worsening debt problems in Europe (and the US), fears for a double-dip recession and following sell-off on equity markets clearly hit consumer sentiment in August.