Europe’s Challenge: It’s No Longer Inflation, But Industry – Data Confirms

Macroeconomic Indicators in the Eurozone

In a day filled with macroeconomic data for the Eurozone, two significant signals about the regional economy emerged.
Preliminary inflation for September has fallen below the ECB’s target of 2.0%, yet the manufacturing PMI index has slid deeper into contraction.

Following two interest rate cuts by the European Central Bank, concerns about consumer prices are noticeably easing across the Eurozone, thanks to reassuring inflation readings.
However, caution remains due to persistent prices in the services sector.

What’s becoming increasingly apparent is the weakening growth in Europe and a continuous crisis in the industrial sector that shows no signs of improvement.
In light of this economic fragility, the focus of investors, analysts, and ECB members has shifted towards the need to stimulate demand, consumption, and business investments.

Manufacturing Activity on the Decline

Manufacturing activity in the Eurozone has declined in September at the fastest rate this year, driven by a sharp drop in demand, even as factories slashed prices, according to a survey conducted on Tuesday.

The recession is widespread, with Germany, the continent’s largest economy, experiencing the most significant deterioration in industrial conditions in the past 12 months.
Consequently, challenges to economic and manufacturing growth have become the primary obstacle to European recovery.

Data Insights on Manufacturing Crisis

The HCOB manufacturing PMI for the Eurozone, compiled by S&P Global, fell to 45.0 in September, just above the preliminary estimate of 44.8 but still far from the 50 mark that indicates growth versus contraction.

Furthermore, an indicator measuring production registered its lowest level in nine months, dipping to 44.9 from August’s 45.8, although it exceeded the flash estimate of 44.5.
Cyrus de la Rubia from Hamburg Commercial Bank commented, “Eurozone industrial output is likely to decrease by around 1% in the third quarter.”

The PMI manufacturing index reflects a context of weakness in the region, albeit with noticeable differences.
For instance, Spain showed stronger manufacturing performance in September, while Germany faced the sharpest factory condition decline in a year.
Meanwhile, Italy saw its PMI manufacturing at 48.3, lower than both previous and expected readings.

Overall, manufacturing in the Eurozone contracted more in September than at any point this year, as lower production volumes responded to a worsening demand sentiment.

Inflation Rate Drops Below 2%

On a positive note, data revealed that consumer prices in the Eurozone have dropped below 2% for the first time since mid-2021.

This decline reinforces expectations of a potential interest rate cut from the ECB in October, signaling the end of a three-year battle to control rampant price growth.
Inflation in the 20 countries sharing the euro fell to 1.8% in September from 2.2% in August, primarily due to declining energy costs.

Core inflation, closely monitored by the ECB, decreased to 2.7% from 2.8%, falling below the anticipated 2.8%.
Despite these improvements, ECB officials remain cautious, acknowledging that pressures in the services sector, while easing slightly, have not completely dissipated.