Eurozone PMI Picks Up In August Amid Olympics Boost

Eurozone PMI increased in August, driven by a jump in French services activity due to Olympics effects, but manufacturing remained in contraction. The services PMI rose, but manufacturing output and new orders declined.

The eurozone started the year with GDP growth surprises, but recent data suggests slowing growth, and the PMI provides little reason to upgrade the economic outlook. Inflation pressures are weakening, with a drop in input prices reported, but businesses reported an increase in selling prices.

The author remains cautious on the eurozone economy based on this PMI reading, and the implications for ECB policy in the September meeting will be closely watched. The Paris Olympics boosted the eurozone economy through increased spending, with French private sector output rising to a 17-month high.

However, the underlying eurozone economy remains weak, with manufacturing decline, particularly in Germany, offsetting the Olympic service sector surge. Eurozone wage growth has dropped, easing concerns for the ECB and paving the way for a potential September rate cut.

However, wage growth remains high relative to the 2% inflation target, and productivity growth is weak. Forward-looking indicators suggest moderating wage growth, but the path could be bumpy, as unions in Germany continue high wage demands.