French, German Economies Both Likely Contracted in August, PMIs Show

By Geoffrey Smith 

Investing.com -- Europe's two largest economies both probably contracted in August, as the region's energy crisis generated increasingly stiff headwinds for activity in both manufacturing and services.

S&P's composite purchasing managers indices for Germany and France fell to 47.6 and 49.8, respectively, both below the 50 level that typically separates growth from contraction. That was a 26-month low for Germany and an 18-month low for France, S&P said on Tuesday.

The key German manufacturing sector held up better than expected, however, rising to 49.8 from 49.3 and defying fears of a further slowdown, thanks to an improvement in supply chain problems and a slight easing of some input price pressures. Order backlogs fell for the first time in two years.

That positive surprise helped the euro to pare some of its losses in early trading in Europe on Tuesday. By 03:45 ET (07:45 GMT), the euro was at $0.9939, having traded as low as $0.9902 overnight, its lowest in over 20 years.

The demand side of both surveys was less encouraging, however. Both surveys showed sharp drops in new orders and Germany registered a big increase in inventories, as surging prices and growing uncertainty over consumers' ability to pay them led to a drop in output.

“The PMI data paint a bleak picture of the German economy midway through the third quarter, showing a deepening decline in private sector business activity," said Phil Smith, an analyst with S&P Global Market Intelligence. "Continued weakness in manufacturing is being compounded by a slowdown in the service sector, with surveyed businesses reporting a growing strain on demand from high inflation and increased interest rates."

While he acknowledged that confidence among survey respondents had ticked up from July's low, "With the threat of an energy crisis still looming large, the outlook remains riddled with uncertainty.” Smith said.