Eurozone PMI Below 50: ECB to Accelerate Easing?

• News
• 2024-06-08

The sluggish economic activity in the Eurozone's private sector has continued into its second month, with output in the region's two largest economies under pressure and little sign of recovery. Data released on Thursday showed that the Eurozone's October SPGI Composite PMI preliminary value was 49.7, in line with market expectations, although slightly higher than the previous value of 49.6, it remains below the 50 threshold. Specifically, the Eurozone's October SPGI Manufacturing PMI preliminary value was 45.9, higher than the previous value of 45 and the market expectation of 45.3; the Eurozone's October SPGI Services PMI preliminary value was 51.2, lower than the previous value of 51.4 and the market expectation of 51.5.

The latest data does little to alleviate concerns that the Eurozone economy, after a strong start in 2024, is slipping back into stagnation. As the "engine" of the Eurozone economy, Germany's October SPGI Manufacturing PMI preliminary value was 42.6, which has been below the threshold for several months, with the country's manufacturing sector struggling with high energy costs and weak demand; France's October SPGI Composite PMI, Manufacturing PMI, and Services PMI all declined, indicating that France's difficulties have deepened further.

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Commerzbank analyst Cyrus de la Rubia said: "The continued slump in Eurozone manufacturing is largely offset by a slight increase in the service sector. At present, it is unclear whether we will see further deterioration or improvement in the economy in the near future."

Weak economic growth, will the European Central Bank's easing path become more aggressive?

The Eurozone's economic downturn has sounded the alarm for the European Central Bank. The European Central Bank cut interest rates for the third time this year last week, and for the second consecutive time, reducing the deposit facility rate to 3.25%. For policymakers, the risk is that below-average economic expansion will lead to inflation falling below the 2% target, as was the case for nearly a decade before the pandemic.

European Central Bank Governing Council member Olli Rehn said on Tuesday: "In the past few months, economic growth prospects have clearly weakened, which could also increase deflationary pressures." "We must be vigilant - and perhaps also concerned - about the possibility of inflation being lower than expected."

Eurozone economist David Powell said: "The Eurozone's October PMI data shows that the downside risks to GDP growth in the last quarter of this year remain significant. As the deflationary process progresses, the weakness in economic activity may accelerate the European Central Bank's shift towards a neutral interest rate policy."

Money markets expect that the European Central Bank's monetary policy will provide more support for the economy. Investors have now increased their bets on the European Central Bank cutting interest rates. They expect that the European Central Bank will carry out a series of rate cuts, with the deposit facility rate falling to 2% by mid-2025.

At the same time, according to several informed sources, European Central Bank policymakers have begun discussing whether it is necessary to lower interest rates to a level sufficient to stimulate the economy, known as below the neutral rate. Informed sources said that some policymakers believe that the European Central Bank is already behind the curve and needs to cut interest rates more significantly than previously expected to prevent inflation from being too low - although there are not many policymakers with this view, their numbers are increasing.

Will there be a 50 basis point rate cut in December?Traders are currently engaged in heated debates over whether the European Central Bank (ECB) will cut interest rates by 50 basis points in December. The swap market suggests that there is a 45% chance the ECB will cut rates by 50 basis points at its last meeting of the year. Prior to the ECB's decision to cut rates by 25 basis points last week, the market had only anticipated a 25 basis point cut for December.

Some ECB policymakers have also hinted in recent days that they may be open to accelerating the pace of easing. The Governor of the Banque de France, Francois Villeroy de Galhau, stated: "We are not behind the curve today, but flexibility should prevent us from taking such risks in the future. The risk of reducing our restrictive stance too late is indeed likely to become greater than the risk of acting too quickly. If our inflation rate remains at 2% next year, and the economic growth prospects for Europe remain sluggish, there is no reason to maintain a restrictive monetary policy, no reason to keep our interest rates above the neutral rate."

The Governor of the Bank of Italy, Fabio Panetta, claimed: "The coexistence of low inflation and weak economic growth clearly favors further easing of monetary policy. Given that the ECB is likely to reach the 2% inflation target 'much earlier' than its September forecast of the end of 2025, the direction of interest rates is clear, and the necessity of reducing borrowing costs below the neutral level cannot be ruled out."

Some officials also emphasized the need for caution. ECB President Christine Lagarde said: "I believe that, for me, the direction forward is clear. The measures we have taken since June are wise and should continue with caution. The policy direction is clear, but the pace should be determined based on backward and forward-looking factors."

ECB Chief Economist Philip Lane pointed out: "There is a high degree of confidence that the disinflation process is proceeding smoothly, but at the same time, we expect unemployment to remain low, consumption to grow, and investment to recover. Although some recent data have raised questions about growth forecasts, the economies of the 20 member states have not shown signs of 'sharp weakness.'"

For policymakers, one reason to remain cautious may be some signs that price pressures still exist. Analyst Cyrus de la Rubia said: "Inflation in the service sector seems likely to remain high. This could be due to ongoing wage pressures, which are particularly severe for service providers." "All of this supports the view that the ECB may cut rates by 25 basis points in December, rather than the 50 basis points that some have been talking about."

S&P Global stated that output growth in other eurozone countries is the fastest in four months, with the exception of Germany and France. However, the agency also warned that as employment numbers decline for the third consecutive month, and at the fastest pace since 2020, eurozone businesses are increasingly considering layoffs in October.

Analyst Cyrus de la Rubia also noted that hiring in the service sector has almost come to a halt for the first time since the beginning of 2021, "The real question is whether higher wages and lower inflation can revive consumer spending, which would provide a much-needed boost to service providers."