Declining economic activity in euro zone raises odds of ECB rate cut

Economic activity in the euro zone is on the decline as the temporary boost from the Paris Olympic Games fades. The unexpected decline increases the likelihood that the European Central Bank (ECB) may cut interest rates again in October. 

A new survey by S&P Global revealed that economic activity in the eurozone shrank in September for the first time in seven months, with the Purchasing Managers Index (PMI) dropping 2.1 points to 48.9, which is below the critical 50-point threshold that signals contraction. 

The downturn is largely attributed to the conclusion of the Olympic stimulus, which has caused a sharp slowdown in France’s service sector and a contraction in its economy. The euro zone’s industrial sector furthermore continues to struggle, with output declining for the 18th consecutive month. Germany, the bloc’s largest economy, experienced a deeper contraction in September compared to the previous month, exacerbated by high energy prices and increased competition from subsidised Chinese industries.

The deteriorating economic conditions, combined with the slowing rise in input and output prices, are raising the chances of an ECB rate cut in October. The speculation of a faster rate cut drove the euro down by nearly three-quarters of a cent to $1.109. Long-term European interest rates also fell.

On 12 September, the European Central Bank already lowered interest rates, indicating that borrowing costs would continue to decrease in the coming months, as inflation eases and economic growth in the euro zone weakens.

^{© Imageglobe Jonas Hamers}