Eurozone economy stalls as north-south divide emerges

The euro zone’s recovery ran out of steam midway through the third quarter, with gauges of activity pointing to contractions in Italy and Spain.

While manufacturing output rose markedly in August, the larger services sector saw only marginal growth, according to an IHS Markit report. Orders increased at a slower pace, job cuts continued and confidence about the outlook eased. A separate report showed an unexpected decline in retail sales in July.

“The rebound has lost almost all momentum,” said Chris Williamson, an economist IHS Markit. “The autumn is likely to still see the economy rebound strongly from the collapse witnessed in the spring,” but “the survey highlights how policy makers will need to remain focused firmly on sustaining the recovery”.

Coming in a week that saw the euro-area inflation rate drop below zero for the first time in four years, the PMI weakness is another worrying sign for the European Central Bank.

Policy makers meet next week, though it’s not clear if they’ll boost stimulus again just yet.

The decline in euro-area retail sales follows big gains in May and June as lockdowns were eased. But job concerns as unemployment edges higher could mean consumer favor saving over spending, which would damp retail demand in the coming months.

Governments are also trying to help the recovery along with more stimulus spending. France this week unveiled details of a €100bn stimulus plan, and German Chancellor Angela Merkel’s parliamentary caucus backed plans allowing for further extraordinary deficit spending next year.

Markit’s composite index of both sectors fell to 51.9 in August from 54.9 in July. Readings for Germany and France eased, while Italy slipped slipped below the 50 line that divides expansion from contraction.

The report also pointed to an ongoing squeeze on profit margins, with businesses forced to cut prices to help sales even as costs increased.

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