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IHS Markit notes that Germany was “perhaps the biggest cause for concern” as output growth slowed to a 15-month low
IHS Markit notes that Germany was “perhaps the biggest cause for concern” as output growth slowed to a 15-month low

Eurozone PMI Revised From Gain to Fall

ECB may extend the duration of its bond-buying program, which is currently set to end in March 2017

Eurozone PMI Revised From Gain to Fall

The 19-country eurozone lost some economic momentum in August, largely because of a slowdown in Germany, a closely watched survey showed Monday, days ahead of another possible stimulus package from the European Central Bank.
Financial information company IHS Markit said its purchasing managers’ index—a broad gauge of economic activity—for the eurozone fell to a 19-month low of 52.9 points in August from 53.2 the previous month. The fall was unexpected as the initial estimate for August was 53.3, AP reported.
In spite of the fall, the eurozone is still growing, albeit sluggishly as anything above 50 indicates expansion. IHS Markit said the August reading is pointing to a quarterly economic growth rate of 0.3%.
The firm did not assign any fundamental reason to the slowdown, such as uncertainty related to Britain’s decision in June to leave the European Union, but did note that Germany was “perhaps the biggest cause for concern” as output growth slowed to a 15-month low.
Italy and France also saw modest rates of growth while Spain remained the “standout performer” with another strong quarter of growth at around 0.7%.
The firm’s chief economist, Chris Williamson, said the survey overall was “clearly disappointing” and suggested it may fuel expectations of a further stimulus package from the European Central Bank this week.
“The survey data will fuel expectations that the ECB would prefer not to wait before injecting more stimulus into the economy, adding pressure for policymakers to act later this week to help shore up confidence in both the outlook for the economy and the bank’s commitment to its inflation target,” he said.

  Promoting Business Activity
The central bank has launched a series of stimulus measures to help the eurozone over the past couple of years, including cutting its key interest rate to zero. It is also pumping €80 billion ($90 billion) of new money into the economy every month by buying bonds from banks and companies in the hope of keeping a lid on borrowing rates in the real economy to encourage lending and promote business activity.
Williamson said the central bank may just extend the duration of its bond-buying program, which is currently set to end in March 2017, at its meeting on Thursday.
The decision over whether the ECB will do anything more is no foregone conclusion, not least after separate figures from the European Union’s statistics agency showed retail sales across the eurozone rising by a whopping 1.1% in July, more or less double the rate anticipated among economists.
That increase, which followed on from a 0.1% decline in June, adds weight to the argument that Britain’s Brexit vote may not have had much of an impact on economic confidence—at least in the short-term.

  Bankers Up in Arms
When the European Central Bank’s top officials gather in Frankfurt this Thursday, they will confront a dilemma that has only grown more difficult over the summer.
Bankers in Germany and elsewhere are up in arms about the ECB’s ultra-loose monetary policy—most of all, negative interest rates that have crushed many institutions’ profit margins.
But the lackluster recovery has also led prominent economists to urge the eurozone’s monetary authority, and its counterparts elsewhere, to go further in their actions rather than reining them in.
A report last week by the International Centre for Monetary and Banking Studies and the Center for Economic Policy Research concluded that interest rates should be cut further below zero and asset purchases expanded.
“Any side-effects are manageable and not of a magnitude to justify timidity,” said the study, known as the Geneva report and written by four senior economists.
While the debate between partisans and opponents of negative rates has become steadily more impassioned, in practice the effectiveness of such policies often depends on the characteristics of individual economies.
Factors such as how banks finance themselves, prevalence of private pensions, strength of national currencies and the use of alternatives to cash are particularly important.

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