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The euro area economy had a tough second half in 2023. We can see in the chart below that business sentiment for both manufacturing and services dropped below 50 indicating contraction.
There were encouraging signs at the start of the year that this was about to turn around. The Services PMI jumped above 50 and the Manufacturing PMI looked like it could get back to 50. Economic growth forecasts for the region were increased on the back of this improvement. Over the last couple of months, this has gone into reverse. The Manufacturing PMI is back to the lows of this year and the Services PMI has been dropping for three months in a row now. Weak international demand, from China in particular, is put down as the reason for this renewed weakness. This is unlikely to change in the near future.
Consequently, economists are now talking about cutting their growth forecasts for the region back to where they were at the start of the year. The one solace we can take from this is that this does allow the ECB to cut interest rates if it feels comfortable that inflation is behaving itself. This makes the region attractive for fixed income investors.
Please note that the next edition of Chart of the week will be published on 4 September. In the meantime, if you’ve any queries, please contact your Goodbody representative.
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