(Bloomberg) -- The euro zone’s two largest economies are deteriorating quickly, with services following manufacturing into a deep slump.
Flash Purchasing Managers’ Indexes for August show worse-than-expected contractions in private-sector activity in Germany and France. Firms in both countries saw weakening demand and reported drops in order backlogs that suggest more trouble ahead.
S&P Global’s gauge for Germany dropped to 44.7 — the lowest in more than three years — from 48.5 in July. A similar measure for France held steady at 46.6, still far below the 50 threshold for growth.
The results add to evidence that dwindling global demand, high inflation and the European Central Bank’s aggressive monetary-tightening cycle are taking their toll on the economy.
Investors scooped up German debt, sending the 10-year yield tumbling 9 basis points to 2.56%, while traders aggressively pared interest-rate wagers and now see a 60% chance of a further quarter-point hike compared with 80% earlier.
The euro fell 0.3% against the dollar to $1.0813, the lowest since mid-June.
“It strengthens the hands of those arguing for a pause in September,” said Dirk Schumacher, an economist at Natixis SA. “The economy is clearly not doing well given these figures.”
Output in French services fell at the quickest pace in 2 1/2 years in August, while manufacturing declined for a seventh month. New orders dropped for a fourth straight month. At the same time, inflation pressures eased.
“The French economy is stuck in a rut,” said Norman Liebke, an economist at Hamburg Commercial Bank. “We might be headed for a contraction in the third quarter.”
Read More: Germany’s Economic Malaise Evokes ‘Sick Man of Europe’ Era
Germany’s problems are worse. Services shrank for the first time in eight months, crushing hopes that the sector would be able to cushion the country’s devastating industry slump.
What’s more, prices are once again on the rise. Services firms in particular faced a steep and accelerated increase in expenses due to higher fuel costs and sustained wage gains.
“Any hope that the service sector might rescue the German economy has evaporated,” said Cyrus de la Rubia, Hamburg Commercial Bank’s chief economist. Factoring in the latest report, his GDP nowcast model indicates the economy is set for a contraction of almost 1%.
Euro-area PMI data later on Wednesday are expected to reveal a similar level of contraction to July. Earlier numbers from Australia pointed to a deepening contraction, while a measure for Japan showed solid growth. UK numbers are likely to indicate slight expansion, while figures from the US are predicted to show stable growth.
--With assistance from Mark Evans, Joel Rinneby and James Hirai.
(Updates with market reaction starting in fifth paragraph, economist comment in seventh paragraph.)
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More Trouble Ahead for the Euro Zone’s Two Biggest Economies - BNN Bloomberg
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