- The eurozone composite PMI fell to 51.6 from 54.9 in July: activity is still growing, but at a slower pace.
- Services came in at 50.1, right on the threshold that separates growth from contraction.
- It is a survey indicator: useful as a quick signal, not as an exact measure of GDP.
On 21 August 2020 the consultancy IHS Markit published the preliminary estimate of the August purchasing managers’ indices (PMI). The eurozone composite index, which combines industry and services, fell to 51.6 points from 54.9 in July, a larger drop than analysts had forecast. The services index stood at 50.1 and manufacturing at 51.7. A reading above 50 indicates expansion; below it, contraction.
The reading confirmed what other indicators suggested: after the initial rebound that followed the end of lockdowns, the pace of recovery was easing. Analysts attributed this partly to the return of infections in several countries, and by country activity in Germany kept growing solidly while in France it was losing strength. For business owners and families, the figure itself matters less than what it may foreshadow about the coming months.
What a PMI measures
PMI indices are compiled from surveys of a broad sample of company purchasing managers, who are asked whether output, orders, employment or prices have risen, fallen or stayed the same compared with the previous month. From the answers an index is calculated that oscillates around 50: above it means more companies report an increase than a decrease, and below it the opposite. Each country and each sector has its own index, and the composite weights industry and services according to their share of the economy.
It is a leading indicator, because it is published before GDP and official data, which is why markets follow it closely. But it has limits: it measures the direction of change, not its size; it is a preliminary estimate that may be revised, and it does not replace national accounts. A reading of 51.6 does not mean the economy is growing by 1.6%, only that most surveyed companies report activity slightly higher than the previous month.
The message of the fall
The drop from 54.9 to 51.6 does not indicate that the economy is contracting again, but that it is growing more slowly than expected. It is the difference between bouncing back strongly and recovering with difficulty. Services, the sector most affected by restrictions on personal contact, stood at 50.1, practically stagnant, while industry held up somewhat better, with 51.7 on the manufacturing index.
That difference matters for Spain, where the services sector includes tourism, hospitality, leisure and transport, with a very large weight in employment and wealth. A European indicator is not a Spanish one, but it suggests that demand for services and consumer confidence in other countries could remain weak through the autumn, just as the high season ends.
Reading it sensibly
For a company, an indicator like this is not an instruction but a signal to review assumptions. If the budget for the last quarter assumes a rapid recovery in sales, it should be tested against more cautious scenarios, checking what happens to cash flow, supplier orders and inventories if the pace is half what was expected.
For a family with investments, a single month’s macroeconomic data rarely justifies decisions on its own. The sensible course is to stay consistent with each person’s horizon and risk profile and to discuss any change with a regulated financial adviser. This note is informative and does not recommend buying or selling any product.
A survey index shows the direction of the wind, not the speed of the ship.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
