Euro area: PMIs continue to weaken – Is this a goodbye to growth?

The good start of the year continued into Q2, with euro area GDP growing 0.3% q/q, building on the positive Q1 performance. The increase was broad-based between countries, especially spurred by Spain while German GDP shrank. While growth was decent, it fell below the ECB's projection of 0.4% q/q.

The July PMI growth indicator showed signs of the economic recovery losing steam, with the composite measure unexpectedly falling to 50.1 from 50.9. Despite the downtick in the services sector, the index remains in growth territory, while the manufacturing counterpart continues to struggle. We estimate that seasonality explains some of the weakening in the PMIs over the summer. Looking ahead, we thus expect the services sector to continue fuelling growth given rising real incomes and a strong labour market.

July's inflation report was largely as expected. Headline inflation rose to 2.6% y/y from 2.5%, while core inflation stayed put at 2.9% y/y, slightly above consensus of 2.8%. Services price pressure remains too strong for the ECB's liking, still posing an upside risk to the inflation outlook. Looking ahead, we foresee headline inflation averaging 2.3% in H2 2024, partly due to energy base effects dragging prices lower.

While the ECB's July meeting was uneventful without any new policy signals, the September meeting will be pivotal. We highlight data on Q2 wages, productivity and profits in August as imperative for the ECB's decision at the September meeting, where we currently expect the ECB not to lower the policy rate.

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