Stalling trade growth a headwind for Eurozone economy

The 19-country eurozone economy lost momentum in September despite a resilient performance by the services sector in Italy, according to a closely watched survey released Wednesday.

Financial information firm IHS Markit said its composite purchasing managers’ index, a key measure of business activity in services and manufacturing, slipped to 54.1 points in September from 54.5 the previous month.

Though anything above 50 indicates expansion, the decline provides further evidence that the eurozone economy cooled during the summer as trade growth stalled. Trade tensions around the world, mainly between the United States and China, have stoked worries that protectionism is on the rise to the detriment of business.

Despite the flatlining in exports, the firm’s survey still points to quarterly economic expansion in the eurozone economy of 0.5%, which is strong relative to the growth seen in the past decade.

Chris Williamson, the firm’s chief business economist, said the slowdown is set to continue into the fourth quarter as “recent months have seen a clear loss of momentum in terms of both output and new order gains.”

Interestingly, the survey showed the Italian services sector was robust in September despite mounting worries in financial markets about the new populist government’s economic policies, which has seen the country’s borrowing rates rise.

“This suggests that, so far, Italian businesses have remained sheltered from concerns about the country’s fiscal stance and the resulting volatility in the Italian sovereign bond market,” said Moritz Degler, economist at Oxford Economics.

Still, few economists are predicting Italy to break out of its era of tepid growth, especially if the global economy falters in the face of rising protectionism.

That means economic growth around the world may become increasingly reliant on domestic demand.

In the eurozone, that may be a source of concern. Separate figures from the European Union’s statistics agency showed that retail sales fell in August for the second month, this time by 0.2%. Year-on-year, they were down 0.2%, too.

The weakness in spending is unexpected given that unemployment has been falling over the past few years. Figures released this week showed the jobless rate at 8.1%, a decade-low.

“Although conditions in the labour market continue to improve, today’s figures show retail sales are still modest, which does not bode well for household consumption growth in the third quarter,” said Alastair Neame, senior economist at the Centre for Economics and Business Research.

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Pan Pylas, The Associated Press

Pan Pylas is a reporter with The Associated Press,  an American not-for-profit news agency headquartered in New York City and founded in 1846.