Eurozone August 2024: Olympic Gains and Recession Pains Shape Economic Outlook

As the Eurozone navigates a landscape of mixed economic signals, August 2024 presents a moment of both opportunity and caution. The French economy sees a temporary uplift driven by the Paris Olympic Games, yet underlying challenges persist, particularly in manufacturing. Meanwhile, Germany’s private sector remains in contraction, deepening fears of a recession. Across the Eurozone, modest growth in services contrasts with continued manufacturing decline, underscoring a fragile recovery. In this complex environment, central banks face critical decisions on rate cuts, with inflationary pressures and economic uncertainties shaping the path forward.

In August 2024, the French economy experienced its strongest growth since March 2023, driven primarily by a robust expansion in the services sector. The HCOB Flash France Composite PMI rose to 52.7, indicating the first month of economic expansion since April. This growth was fueled by increased activity in the services sector, particularly due to the Paris Olympic Games. In contrast, the manufacturing sector continued to decline, with factory orders falling at the steepest rate in over four years.

Despite the positive headline figures, the underlying economic conditions in France remain fragile. Employment in the private sector decreased for the first time since January, and new business orders continued to shrink. Optimism for future growth also weakened to its lowest level in nearly a year, reflecting concerns over political uncertainty, real estate challenges, and high interest rates. Additionally, while cost pressures eased, the prices charged for goods and services increased at the fastest pace since January.

Overall, the boost from the Olympic Games may be temporary, with deeper issues in the manufacturing sector and broader economic challenges likely to resurface in the coming months.

In August 2024, Germany’s private sector remained in contraction, with business activity declining for the second consecutive month, according to the HCOB Flash Germany PMI. The Composite PMI dropped to 48.5, marking a five-month low, as both the manufacturing and services sectors struggled. Manufacturing continued its deep slump, with new orders, especially from abroad, falling sharply. Services activity also weakened, growing at the slowest pace since March.

Employment in the private sector saw its steepest decline in four years, reflecting companies’ reduced optimism about future growth amid ongoing economic and geopolitical uncertainties. Despite easing cost pressures, particularly in the services sector, prices for goods and services rose at the fastest rate in six months.

The overall outlook for Germany remains uncertain, with the manufacturing sector’s recession deepening and signs of this weakness beginning to affect the previously resilient services sector. The anticipated recovery in the second half of the year has yet to materialize, raising concerns about a potential recession as the economy struggles with declining demand and rising uncertainty.

In August 2024, business activity in the Eurozone saw a modest increase, driven primarily by a surge in the services sector, particularly in France, where the Olympic Games provided a temporary boost. The HCOB Flash Eurozone Composite PMI rose to a three-month high of 51.2, indicating a slight acceleration in growth. However, the underlying economic picture remains fragile, with new orders continuing to decline and employment stagnating across the region.

Manufacturing in the Eurozone remained in contraction, marking its seventeenth consecutive month of decline. While services activity grew, particularly in France, Germany’s service sector showed signs of slowing down. Confidence among businesses fell to its lowest level in 2024, reflecting concerns about the future, especially as the temporary Olympic-related boost in France is expected to fade.

Despite easing input cost pressures, particularly in the services sector, companies raised their selling prices at the fastest pace since April, indicating ongoing inflationary pressures. The European Central Bank (ECB) may find some reassurance in the slowing cost inflation, potentially supporting the case for an interest rate cut in September.

In a recent Bloomberg report, European Central Bank (ECB) Governing Council member Olli Rehn emphasized the growing risks to Europe’s economic outlook, suggesting these challenges strengthen the case for a rate cut at the ECB’s September meeting. Despite progress in reducing inflation from its 2022 peak, Rehn highlighted ongoing concerns about weak manufacturing growth and the uncertain economic environment. Markets are anticipating at least two more rate cuts this year.

In the latest release of the FOMC minutes, the majority of the members believe that if economic data continues to align with expectations, a rate cut would be appropriate at the next meeting, with markets already fully pricing in a 25 basis points reduction in September. However, members emphasized that a significant spike in inflation or growth could prompt a reconsideration. The consensus is driven by two main factors: substantial progress toward the 2% inflation target and concerns about slower economic growth indicated by labor data. While there’s confidence that inflation will continue to ease, the FOMC is cautious about committing to a long-term rate trajectory until after the initial rate cut. Despite some persisting concerns, particularly regarding labor market data, the overall sentiment points to a rate cut in September, with the potential for additional cuts in the future.

Since the consolidation phase in June, the EURUSD has increased by more than 4.5%, with potential price targets surpassing the 1.1200 psychological mark. Specifically, if the positive momentum continues, the EURUSD may climb to 1.12207, 1.14333, and 1.14992. The 20 and 50-period Exponential Moving Averages and the Momentum oscillator indicate a continuation of the uptrend. However, the Relative Strength Index has moved into the overbought area above 70. If the sellers take control of the market, then the following support lines may be relevant: 1.10799, 1.10080, and 1.09475.

The Eurozone’s economy is marked by mixed signals, with France experiencing a temporary boost from the Paris Olympic Games, particularly in its services sector. However, underlying challenges in manufacturing persist. Germany’s economy, meanwhile, is in deeper trouble, with its private sector contracting and raising fears of a recession. Across the Eurozone, modest growth in services contrasts with ongoing manufacturing decline, highlighting a fragile recovery. Central banks face critical decisions on interest rates, balancing inflationary pressures with economic uncertainties. The European Central Bank (ECB) is considering rate cuts, while the U.S. Federal Reserve is also leaning towards a rate reduction in response to economic data. The EURUSD exchange rate shows potential for further gains, but caution is advised due to market volatility.