Definitely alarming findings for the Eurozone economy which confirm the onset of a possible recession. The S&P Global Eurozone PMI Composite Output Index fell to 49.4 points in July from 52 the previous month. It is about the minimums at 17 months. The euro zone economy therefore entered contraction territory in July, according to first PMI survey indicators, with production and new orders both fall for the first time since the COVID-19 lockdown in early 2021.
The accelerated decline in manufacturing, adds S&P Global, has been accompanied by stalled growth in the services sector as the cost of living continued to rise to erode the tailwind of pent-up demand from the pandemic. The steepest decline was recorded in Germany, where the composite PMI fell to a low of 48 since June 2020. Although output continued to grow in France, the pace of growth slowed sharply with composite PMI falling to 50. , 6 at the lowest rate of expansion at 16 months.
The Eurozone manufacturing PMI index in turn marks a further acceleration into contraction territory. The flash reading for July came in at 46.1 points from 49.3 the previous month. These are the lows at 26 months.
“The eurozone economy looks set to contract in the third quarter as activity slid into decline in July and forecast indicators suggest the worst may come in the coming months,” argues Chris Williamson, Chief Business Economist at S&P. Global Market Intelligence.
Excluding the months of the pandemic, July is the first contraction of composite SMEs since June 2013.
Will the recession hold back the ECB?
What does this also mean from a monetary policy perspective? Among analysts there are those who see little room for a streak of rate hikes by the ECB, which just yesterday brought the first hike (+50 bps) since 2011. The sharp decline in the composite PMI from 52 to 49, 4 indicates that recessionary pressures are spreading in the eurozone economy – says Bert Colijn, Senior Economist of Ing -. For the European Central Bank, this confirms our view that this year it will only increase by another 50 basis points in total ”.
Yesterday the ECB put an end to the era of negative rates in the eurozone and in the accompanying statement to the decision the Eurotower acknowledged that it will now be completely dependent on future data and will determine month by month how much rates need to be increased.
Violent reaction of government bonds
The fears that the euro area economy is approaching a phase of severe economic difficulties, which could be exacerbated in the event of a stop in gas supplies from Russia, led investors today to buy government bonds. , starting with the Bund. The German 10-year yield fell to 1.026%, on its lows since the end of May and a long way from the highs of 1.76% reached on 21 June.
Purchases that are also covering the BTP despite the situation of political uncertainty. The ten-year yield travels in the 3.3% area, in a drop of over 30 basis points from yesterday’s peaks in the wake of Draghi’s resignation and the ECB announcement on rates and TPI.
The BTP-Bund spread currently travels in the 228 area.