Olympics madness fails to save eurozone economy as output falls – Euractiv

Analysts warned that overall economic growth, boosted by the Paris Olympics in August, could not improve Europe’s economic situation in the long term, as new figures released on Thursday (August 22) showed a continued decline in output.

The HCOB flash eurozone composite purchasing managers index (PMI), seen as a key measure of economic activity in the euro area, rose to 51.2 in August from 50.2 in July, beating economists’ expectations that the index would rise to only 50.3.

The bigger-than-expected rise, which took the index above the 50-point threshold that separates growth from contraction, was largely driven by the impact of the Olympics on France’s services sector, which lifted the composite index of the EU’s second-largest economy to a 17-month high of 52.7. However, industrial activity fell to an eight-month low for the country.

In numerical terms, France’s overall growth also outpaced the net contraction in Germany, the bloc’s largest economy, where similar persistent weakness in output contributed to a fall in the composite index from 49.1 to 48.5.

Analysts point out that the bloc’s longer-term fundamentals remain weak, which is a concern.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told Euractiv that the increase in economic activity was “largely due to the Olympics, which we, and frankly everyone, clearly did not think the PMIs would benefit from.”

“Otherwise the data was quite damp, especially in production,” he added.

Vistesen’s comments were echoed by Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

“At first glance, this seems like a pleasant surprise: activity in the eurozone increased in August. But a closer look at the data suggests that the underlying fundamentals may be shakier than they appear,” he said in a statement.

“With the temporary Olympic boost in France fading and signs of declining confidence in the eurozone services sector, it is probably only a matter of time before the problems in manufacturing also weigh on the services sector,” he added.

German consumers ‘mark major turning point’ as savings rise to highest level in 30 years

The figures come amid continued concerns about the state of the eurozone economy, which is still reeling from the energy shock caused by Russia’s large-scale invasion of Ukraine in February 2022.

According to the International Monetary Fund, the eurozone is expected to grow by just 0.8% this year, about three times less than the US economy.

Peter Sidorov, senior international economist at Deutsche Bank Research, told Euractiv that Europe is being hit particularly hard by weak demand, which in turn is largely driven by Germany’s historically high savings rate.

“If you leave out the Covid period of forced saving with the lockdowns, the savings rate in Germany is the highest since the early 1990s,” Sidorov told Euractiv.

Sidorov added that the high savings rate is most likely caused by “a combination of factors,” including high interest rates, general economic uncertainty and the “lingering effects of the energy crisis on real welfare.”

Vistesen also said that German consumers are “the main fulcrum” for the progress of the eurozone economy.

“We know manufacturing is still weak. We know construction is still weak. That’s probably not going to change much in the next few quarters,” the analyst said. “But the consumer could really be an upside risk (…) if they start spending some of their income,” he added.

ECB rate still ‘100 basis points too low’ despite expected September cut

The latest PMI data also come ahead of a widely expected 0.25% interest rate cut at the European Central Bank’s (ECB) next meeting in September – which would mark the second cut of the year.

“We think a 25 basis point rate cut has been implicitly announced in September,” Sidorov said, adding that Deutsche Bank’s own baseline forecast is for one rate cut per quarter after next month.

According to Vistesen, his team’s analysis shows that the ECB’s policy is currently too restrictive.

“Given where inflation is and where inflation is likely to be (…) that’s probably 100 basis points too tight. So they need to come down relatively quickly,” he said.

The ECB’s key interest rate currently stands at 3.75%, compared to -0.5% before the conflict in Ukraine.

According to the ECB’s current forecasts, due to be revised next month, eurozone inflation will hover “around 2.5%” in the coming quarters, before falling to 2.2% in 2025 and 1.9% in 2026.

The headline price index rose to 2.6% in July from 2.5% in June, well below the 10.6% peak that followed Russia’s invasion of Ukraine, but still above the ECB’s 2% target.

De la Rubia also warned that expected rate cuts may not significantly boost the European economy – unlike in the UK, where the Bank of England’s decision to cut rates earlier this month significantly improved business confidence.

“The expected rate cuts by the ECB, which are expected by most analysts, could boost sentiment somewhat, but it is clear that overall sentiment remains poor,” he said.

(Edited by Anna Brunetti/Rajnish Singh)

Read more with Euractiv

Italian central bank governor calls for common EU fiscal capacity

To ensure peace and prosperity, the EU needs a so-called “common fiscal capacity,” Fabio Panetta, president of the Italian central bank and former member of the European Central Bank’s governing council, said Wednesday at the annual Catholic summit in the city of Rimini.