Europe's single currency area is sinking further into economic malaise and the authorities will likely need to act further to help.
The latest economic metrics for the eurozone, which covers 19 European Union countries, show sharply slowing growth across the main sectors, manufacturing, and services.
"The eurozone flash PMI dashed hope that the worst was past and supports those that were calling for bold ECB [European Central Bank] action," states a recent report from currency dealing firm Bannockburn Global Forex.
The ECB is the equivalent of the U.S. Federal Reserve.
IHS Markit Eurozone Composite PMI registered 50.4 for September, down from 51.9 in August and also below investor expectations of 51.9. The composite PMI covers both the services sector as well as manufacturing, with a reading of above 50 indicating growth and below 50 a contraction. In this case, that means the latest data shows that the eurozone economy is moving closer to a recession and Germany may already be there.
A recent report from London-based research company Capital Economics sees nothing but gloom. It states:
All in all, with the euro-zone’s manufacturing sector in the doldrums and services activity starting to lose pace, there is little reason to think that GDP growth will pick up as the ECB and the consensus forecasts assume.
The Capital Economics report says overall growth this year could slip further and may already mean that a significant part of the economy is shrinking.
Europe's biggest economy, Germany, saw its worst Composite PMI reading since the dark days of October 2012, seven years ago, when the entire continent was stuck in economic contraction. The country's manufacturing PMI is the worst in a decade, the report says.
While the overall eurozone could limp along with slightly positive growth this year, the same is not true for Germany.
"[T]here is a strong chance that Germany fell into recession in Q3," the Capital Economics report states.
Anyway out?
What does this mean? Expect further efforts by the ECB to help stimulate the European economy as current efforts will likely fail.
"[T]he ECB’s latest action [is] unlikely to do much good, pressure will build on policymakers to offer further support next year," the Capital Economics report states.
That will likely involve more money printing and the cost of borrowing could dip even further into negative territory.
Earlier this month, the ECB cut a key interest rate to minus 0.5% and restarted its bond-buying program, which is also known as quantitative easing (QE). QE is akin to printing money.
Such moves will likely send the value of the euro tumbling relative to the U.S. dollar.
