PMIs in Focus

This morning, data from the continent indicates that the HCOB Germany Composite PMIs dropped to 44.7 in August, falling at their greatest level since the pandemic in May 2020. The figure marked a considerable slowdown from last month’s print of 48.5 and also came well below expectations of 48.3. It also marked the fourth consecutive monthly fall.

Output in Germany’s service sector also fell for the first time this year and at its sharpest level since November 2022 as it hit 47.3. Meanwhile, factory activity also fell at its largest level in more than three years. The soft print comes as Europe’s largest economy saw growth of just 0% last quarter, itself on the back end of a recession.

The press release stated that “businesses remained pessimistic towards the outlook as rising interest rates, customer uncertainty and high inflation continued to weigh on demand for goods and services. Notably, the survey showed an increase in inflationary pressures, driven by accelerated cost and price increases in the service sector.” Following the press release, the Chief Economist at Hamburg Commercial Bank stated that “Any hope that the service sector might rescue the German economy has evaporated. Instead, the service sector is about to join the recession in manufacturing, which looks to have started in the second quarter. Our GDP nowcast model, which incorporates the PMI flash estimate, now indicates a deeper fall of the whole economy than it did before, at almost -1%.” Hence as some analysts look at the wider implications to German growth, speculation is growing over the extent to which this could feed into a downward trend across the continent.

The continent was dealt another blow this morning with French PMIs also softening. The Composite PMI came in at 46.6, similarly below expectations of a 47.5 print. This matched last month’s level which itself was the greatest contraction since November 2020. This came as France’s manufacturing figure came in at 46.4 while services declined to 46.7. Notable shortfalls came from private sector exports which fell for the fourth consecutive month.

Here, one economist at HCOB stated that “the French economy is stuck in a rut, showing signs of struggle once again. For the third month straight, we’ve seen Europe’s second-largest economy shrinking, as indicated by the HCOB PMIs. Despite hopes of a positive economic outlook, the latest PMI data is throwing a curveball, hinting that we might be headed for a contraction in the third quarter.” More generally Eurozone PMIs also came in weak, delivering a composite level of 47, with a services and manufacturing figure of 48.3 and 43.7, respectively. All eyes now turn to UK PMIs released at 0930 this morning, along with US PMIs at 14:45.

Concerns around the world’s second largest economy have seen investors withdraw funds in droves from the Chinese equity market. The CSI 300 Index – which tracks the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange – has already slipped some 7% over the past month and 1.6% over the day. This brings the index to its lowest level since November and comes as the equivalent of some £7.3bn in overseas funds has been withdrawn from China in the last twelve-day period. The Hang Seng Index has also seen its longest losing streak since November 2021, with the blue-chip index going into bear market at the back end of last week.

The sell-off comes as China’s fragile property market, monetary loosening and lack of fiscal support measures continues to weigh on investor sentiment. On Monday the PBoC cut its 1-year loan prime rate by 0.1 percentage point, bringing it a record low of 3.45%. As we looked at earlier this week, the PBoC’s rate cut follows a deflationary CPI print earlier in the month which gave markets greater concern about the extent to which there has been a slump in demand throughout the economy.

Exports also dropped 14.5% on an annualised basis for July, indicating softening global demand, and raising concerns over whether Beijing will be able to reach their 5% growth target this year.