Global economic fears worsen as service sector dips globally

September 6, 2023

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Global economic fears worsen as service sector dips across China and Europe

Fears about the health of the global economy have intensified following downbeat news about service sector activity in China, the eurozone and the UK.

Share prices fell in Asia and the pound dropped to a 12-week low against the US dollar after fresh signs of weakness in China triggered speculation that its post-lockdown recovery was running out of steam.

Meanwhile, there were signs the steady rise in interest rates is leading to weaker service sector activity in both the UK and the 20-country eurozone.

Markets were particularly rattled by news from China, with speculation that Beijing will need to step up its support for weak levels of demand following the announcement that service sector activity in the world’s second biggest economy fell to its lowest level in eight months in August.

Share prices around the world had rallied on Monday after the troubled property company Country Garden staved off the threat of imminent bankruptcy.

Stock markets struggled after the release of China’s services purchase managers’ index (PMI) and even news that Country Garden had made interest payments on two US dollar bonds failed to lift investor sentiment amid concerns that the stimuli so far provided were too limited in their scope.

The snapshot fell from 54.1 in July to 51.6 in August – below the 53.6 predicted by a Reuters poll of economists and only slightly above the 50 level that separates an expanding from a contracting sector.

Service sector PMIs also dropped below the 50 level in both Britain and the eurozone.

PMIs point to slowdown in the United States and Europe

The global economy appears to be decelerating, according to the latest purchasing managers’ indices (PMIs) from economists globally.

PMIs are forward-looking indicators designed to signal the direction of activity in broad sectors of the economy. They are predominantly based on subindices such as output, new orders, employment, input and output pricing, backlogs, inventories, and sentiment. 

A reading above 50 indicates growing activity. The higher the number, the faster the growth. 

The latest flash PMIs for Europe and the United States, which together account for roughly half of global economic output, worsened from July to August, signalling that tightening monetary policy on both sides of the Atlantic is restricting further activity. Meanwhile, Japan’s PMIs signal that the economy continues to expand at a moderate and steady pace. 

In the Eurozone, the observed PMIs had already indicated declining economic activity in July, with declines in manufacturing activity being only partly offset by modest gains in the broad services sector as a whole.

The worst overall performance observed was in Germany where the manufacturing PMI hit 39.1 and the composite PMI hit 44.7, a 39-month low.

In the United Kingdom, the situation is similar to that of the Eurozone. The services PMI fell from 51.5 in July to 48.7 in August, while the manufacturing PMI fell from 45.3 in July to 42.5 in August, a 39-month low.

The US economy has been unusually strong lately, but the latest PMIs suggest some weakening. The services PMI fell from 52.3 in July to 51.0 in August while the manufacturing PMI fell from 49.0 in July to 47.0 in August.

Unlike Europe, however, the PMIs for the United States do not yet suggest an economic downturn. However, there was a decline in new orders for both manufacturers and service providers, boding poorly for future output.

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