Eurozone August final services PMI 50.5 vs 50.7 prelim | investingLive

• Prior 51.0
• Composite PMI 51.0 vs 51.1 prelim
• Prior 50.9

The carry balance has shifted sides in Europe in August, with the manufacturing sector doing the heavy lifting this time around. The headline services reading is a 2-month low but the overall composite reading is a 12-month high. That said, the latter is still just showing marginal growth at best, so it’s not to say that things are booming. Still, it does point to some resilience in the euro area economy at least.

The good news is that demand conditions reflected an improvement and employment conditions also continued to hold up. However, prices data signalled an acceleration of input cost inflation. The services sector is the main culprit there so that is something to be wary of as prices charged rose to the greatest in four months. HCOB notes that:

“Riding a bike too slowly can make you tip over. That’s the risk facing the eurozone. Yes, the economy has been growing
since the start of the year, but the pace is painfully slow. In August, the HCOB Composite PMI Business Activity Index stood
at 51.0 – barely above stall speed. Political tensions in France and Spain, uncertainty around the EU-US trade deal, and
ongoing troubles in the key automotive sector aren’t helping. On the bright side, increased defense spending across Europe
and Germany’s infrastructure program offer hope that the economy might keep moving forward – and avoid falling off the
bike.

“Right now, the services sector feels more like stagflation than recovery. The rate of expansion has slipped even further from
an already slow pace, while cost pressures have increased and selling price inflation nudged slightly higher. In fact, the
performance of services has deteriorated across all four major eurozone economies: growth has slowed in Spain and Italy,
and Germany and France are showing mild contractions. That said, we wouldn’t call it a downward trend just yet – there are
signs of stabilization in both euro area new orders and backlogs. Still, the overall situation remains fragile.

“The European Central Bank is likely viewing the PMI prices data for services with mixed emotions. On the one hand, rising
input costs point to mounting inflationary pressures. On the other, selling price inflation has barely moved, suggesting that
service providers are struggling to pass those higher costs on to consumers in full. Increasing costs mean that inflationary
pressures are building beneath the surface, however.

“Interestingly, the sluggish momentum in the services sector hasn’t made much of a dent in employment. In fact, headcounts
ticked up slightly in August. Italy and Spain saw a slowdown in hiring, while German service providers even trimmed staff
slightly, but France saw renewed jobs growth. Overall, this points to declining labor productivity across the euro area – a
concern from an inflation standpoint. When productivity drops, the cost per unit of service rises, potentially offsetting the
recent moderation in wage growth. The ECB is keeping a close eye on this dynamic, as highlighted in its latest meeting
minutes.”