World Economy

Eurozone Growth at 20-Month Low

German service providers reported a near-stagnation of output during August
ECB experts believe decline in productivity could have a negative effect on the eurozone’s long-term economic growth.ECB experts believe decline in productivity could have a negative effect on the eurozone’s long-term economic growth.

There was more bad news for eurozone on Friday with the latest flash purchasing manager’s index falling to a near two-year low, indicating that the economic upturn in the region is fragile and failing to achieve any real traction.

The preliminary PMI from Markit showed that business activity in the 19-country region fell to 52.6 in September versus 52.9 in August and below market expectations. This is the lowest seen since January 2015. The PMI is a composite of services and manufacturing activity in the region and the 50-point mark separates expansion from contraction, CNBC reported.

“The door remains open for policymakers to provide further policy support later in the year if they see economic conditions moderate further,” Rob Dobson, senior economist at IHS Markit said in the press release.

Germany’s data, released earlier on Friday morning, saw the flash composite PMI fall to 52.7 in September versus 53.3 in August, hitting a 16-month low. The figures showed that manufacturers recorded ongoing solid growth but service providers reported a near-stagnation of output during the month.

Oliver Kolodseike, an economist at IHS Markit said that the rate of expansion in Germany remained “uninspiring and much weaker than the levels seen around the turn of the year.”

“A big concern is the divergent trends within the economy, with service providers struggling to eke out any meaningful growth ... Weak demand continued to curb inflows of new business and companies reported a lack of work outstanding, boding ill for output growth in coming months,” he said in a press release.

Meanwhile, Stephen Brown, a European economist at Capital Economics, believes that pressure on the European Central Bank to take action will continue to mount.

“We expect it to announce an extension of its asset purchase program in December, if not before.”

  Employment Rising

Employment in the eurozone is rising faster than expected according to the latest economic bulletin from the European Central Bank, Euronews reported.

In proportion to GDP growth, employment is now rising as fast, if not faster, than before the 2007 debt crisis they say, fueled by an increase in part-time work and the service sector growing.

But even as people are getting back to work quicker than earlier hoped, productivity is declining and the ECB experts believe that could have a negative effect on the eurozone’s long-term economic growth.

  German Bond Rally

A rally in Germany’s 30-year bonds paused as investors waited for eurozone manufacturing and services data to gauge whether the economic outlook justifies bets on additional European Central Bank stimulus, Bloomberg reported.

Yields rose across the curve, after dropping this week following the Federal Reserve’s decision to refrain from raising interest rates and scale back predictions of future policy tightening.

Spanish 10-year bond yields climbed from an all-time low. After being held back earlier in the month by the ECB’s failure to signal an immediate extension of stimulus, bonds surged with other assets Thursday as the Fed soothed concern that central banks globally would taper stimulus efforts.

“The high point of the week in economic releases is arguably today’s preliminary September PMIs,” analysts led by Peter Chatwell, head of rates strategy at Mizuho International Plc in London, wrote in a client note. “Our view on fixed income remains bullish, but we would stress that a strong reading would boost fear that the ECB is pausing due to better data. In the context of yesterday’s bull-flattening, we think there is a risk of an over-reaction in case of a beat.”

Germany’s 30-year bund yield rose two basis points, or 0.02 percentage point, to 0.49%, after sliding 12 basis points on Thursday, the steepest decline since June 24. The 2.5% security due in August 2046 fell 0.555, or €5.55 per €1,000 ($1,121) face amount, to 155.919. The yield has dropped 15 basis points this week, the most since June 10.