Eurozone Economic Outlook

The Eurozone’s main growth engine lost momentum in September, raising fresh concerns about regional stability in the wake of the Brexit vote. A closely watched indicator of the German economy fell to a 16-month low in September, as a sharp deceleration in service activity offset sustained growth in manufacturing. The IHS Markit composite purchasing managers index (PMI) fell to 52.7 from 53.3. Anything above 50 indicates expansion in economic activity.

“A big concern is the divergent trends within the economy, with service provides struggling to eke out any meaningful growth,” Oliver Kolodseike, an economist at Markit, said in a statement. “Weak demand continued to curb inflows of new business and companies reported a lack of work outstanding, boding ill for output growth in coming months.”

Despite being known as a manufacturing powerhouse, Germany’s economy is largely driven by services activity. According to The World Bank, services output accounts for 69% of German gross domestic product (GDP). The services sector’s share of GDP has actually increased over the past 20 years, a commonly observed trend in advanced industrialized nations.

Manufacturing activity lifted to a three-month high, but Markit's update said the overall sign is that the eurozone is losing, rather than gaining, momentum. Job creation across the 19 bloc union has also tumbled this month, with employee numbers rising at the slowest pace since April, according to Markit's data.

Rob Dobson, senior economist at IHS Markit said: “The eurozone economy ended the third quarter on a disappointing note, with its rate of expansion easing to a 20-month low in September. While the underlying picture remains one of sluggish growth of close to 0.3 per cent over the quarter as a whole, it also remains clear that the economic upturn is still fragile and failing to achieve any real traction."

Markit economist Oliver Kolodseike said that, “The upturn in Germany’s private sector economy is losing further momentum. Although new business rose further, the rate of expansion remained uninspiring and much weaker than the levels seen around the turn of the year. A big concern is the divergent trends within the economy, with service provides struggling to eke out any meaningful growth. The PMI points to the weakest rise in business activity since the summer of 2013. Moreover, weak demand continued to curb inflows of new business and companies reported a lack of work outstanding, boding ill for output growth in coming months. On a more positive note, optimism towards the 12-month outlook reached a three-month high, suggesting that the current slowdown may only be a temporary soft spot.”

With a spate of German economic data due to hit the markets next week. On Monday, the CESifo Group will release its closely watched indicator of business confidence for September. On Wednesday, GfK will release its forward-looking consumer confidence index for October.

Reports on unemployment and CPI inflation will make headlines in the latter half of the week. Germany’s harmonized index of consumer prices (HICP) is forecast to come in at zero in September. In annualized terms, this translates into a 0.5% increase.