Eurozone Services Sector Contraction Spells Economic Concerns

Highlights

• HCOB PMI Index drops to 47.9 in August.
• New business volume sees steepest decline since Feb 2021.
• Chief Economist Dr. Rubia projects -0.1% GDP decrease for Q3 2023.

Eurozone’s Services Sector Under Pressure

The services sector of the Eurozone is facing a series of challenges, as depicted by the HCOB Eurozone Services PMI Business Activity Index, which slid from 50.9 in July to 47.9 in August, marking its first contraction since December 2022. The largest economies of the Eurozone, namely France, Germany, Italy, and Spain, all observed setbacks, with France and Germany registering the most substantial downturns.

New Business & Demand

The Eurozone’s services sector observed a reduction in the volume of new business for the second consecutive month, at the steepest rate since February 2021. The demand for services has seen a decline eight times since the second half of 2022. Specifically, France and Germany were primarily responsible for this contraction.

Outlook

While the services sector retains a positive perspective regarding future activities, the level of optimism remains consistent with the low of July 2023.

Employment Trends

The drying up of new contracts in August led to a reduction in incomplete tasks, resulting in a cautious approach to hiring. The growth in employment in the sector slowed down, mirroring the rates from February 2021. In particular, Italian service companies reduced their workforce for the second month in succession.

Pricing Dynamics

August saw service providers witnessing the fastest input price increase in three months. Though these prices haven’t touched the highs of 2022, service charge inflation reduced to a 23-month low. Germany, however, still grappled with significant inflation.

Expert Commentary

Dr. Cyrus de la Rubia, the Chief Economist at Hamburg Commercial Bank, reflected upon the data and highlighted potential challenges for the Eurozone in the upcoming months. The once stabilizing services sector now appears to be a burden on the Eurozone’s economy. With the manufacturing sector yet to recover, the region’s economic growth could be at risk. This has resulted in a downward revision of the GDP, now standing at an anticipated decrease of -0.1% for Q3 2023.

The resurgence of input price increases raises concerns about the potential prolonged existence of high inflation, possibly exacerbated by wage hikes. As businesses have become wary of expansion, Dr. de la Rubia suggests that if the current conditions persist, these firms might transition towards reducing their workforce.

Germany and France, in particular, have registered substantial downturns in the service sector, while Italy and Spain have witnessed only mild declines. However, these countries might face steeper downturns in the future, considering the trends in the larger economies.