Hopes of recovery turned into bubbles! German and French economies deteriorate, Eurozone PMI falls into contraction for the first time in six months in September

According to the Zhitong Finance and Economics APP, concerns about the recovery of the region have been exacerbated by the end of the French Olympic boom and the deepening of the manufacturing industry, causing private sector activity in the eurozone to shrink for the first time since March.

Data released on Monday showed that the preliminary value of the S&P Global Eurozone Composite Purchasing Managers' Index (PMI) fell from 51 last month to 48.9 in September, below the boom-bust line of 50, with analysts expecting a slight decline to 50.5.

After the data was released, the yield on German two-year government bonds fell below that of the ten-year government bonds, bringing the yield spread between the two maturities back above zero for the first time since November 2022, as traders bet that the European Central Bank would need to accelerate rate cuts to support the economies of the eurozone's 20 countries. The euro also slipped.

In fact, output in the eurozone's 20 countries has already begun to decline, despite consumers benefiting from cooling inflation and rising wages, they are still reluctant to spend. Weak foreign demand has also put pressure on factories. The plight of German car manufacturers such as Volkswagen highlights this issue.

The Bundesbank had previously warned that the German economy could experience a mild recession following a series of bad news from car manufacturers. After BMW, Mercedes-Benz also lowered its profit expectations last week. Meanwhile, Volkswagen warned that weak demand could force it to close factories in the German market.

Cyrus de la Rubia, economist at Hamburg Commercial Bank, said in a statement, "The eurozone is heading towards stagnation. Given the rapid decline in new orders and order backlogs, it is not difficult to foresee further economic weakening."

Some European Central Bank officials are increasingly concerned about weak economic growth, warning that tight monetary policy cannot allow the economy to stagnate for too long. Although they still say they may keep rates unchanged at the next meeting after the second rate cut in September, some say that drastic economic changes could change their minds.

Currently, the money markets are betting that the European Central Bank will further ease by 44 basis points this year, with a 40% chance of a rate cut in October.

Jamie Rush, Chief European Economist at Bloomberg Economics, said, "The composite PMI shows a deterioration in economic prospects. This to some extent reflects France's return to reality after the end of the Paris Olympics. We expect the eurozone's economy to grow by 0.2% in the third quarter, unchanged from the second quarter. A significant slowdown in growth would be unwelcome for the European Central Bank. If further evidence shows an economic slowdown, this could make a rate cut possible at the October meeting."

The weakness in the eurozone is largely due to Germany, where manufacturers are facing a combination of challenges including declining global demand, increased competition, and domestic structural issues. Germany's composite PMI fell more than expected, dropping from 48.4 to 47.2, the lowest level in seven months, still below the boom-bust line of 50 The pace of factory contraction is accelerating, while the service industry is almost stagnant.

De la Rubia said, "These disturbing figures may intensify the debate in Germany about the risks of deindustrialization and how the government should respond."

Meanwhile, growth momentum in France has also slowed, with the rebound related to the Olympics quickly disappearing and service sector activity dropping significantly. France's composite PMI plummeted from 53.1 to 47.4, well below analysts' forecast of 51.5.

S&P Global stated that output continued to grow outside the eurozone's two largest economies, but at the slowest pace since January. Inflation in the entire region has eased, with pressures on input and output prices also easing.

The weakening economic activity has also impacted the labor market, with manufacturers laying off workers at the fastest pace in over four years. Service sector employment continued to grow, but at the slowest pace since August 2023.

De la Rubia said, "We expect that the previously stable official employment data in the eurozone will deteriorate in the coming months, although the trend should be more stable than during previous economic downturns."

Elsewhere, the UK's composite PMI fell more than expected but remained in expansion territory. The U.S. PMI data will be released later on Monday, with economists expecting the reading to remain steady at 54.3