The Euro area composite flash PMI plunged by 2.1pt to 48.9 in September, notably below expectations. The deceleration in the composite index was driven by the services sector, where the index fell (by 2.4pt) to 50.5, with manufacturing output contracting, printing at 44.5.

Euro Area Composite PMI (Sep, Flash): 48.9, GS 50.6, consensus 50.5, last 51.0.

Euro Area Manufacturing PMI (Sep, Flash): 44.8, GS 45.8, consensus 45.7, last 45.8.

Euro Area Services PMI (Sep, Flash): 50.5, GS 52.4, consensus 52.3, last 52.9.

This was driven not only by a big pay-back out of France, reflecting the post-Olympics adjustment, but also by pronounced weakness in Germany, and a slowing periphery.

The composition of the September report showed a decline in new orders and new export orders, with employment falling further below 50, mostly driven by a notably weak reading out of Germany, where the employment index posted a sizeable month-on-month decline.

This was mostly driven by the manufacturing sector, and “this comes as several major automotive suppliers have announced significant job reductions”.

Business confidence continued to decline in September, dropping for the fourth consecutive month to its lowest value this year. Turning to price pressures, the input price components edged down notably in September, driven by both sectors, and the output price index declined as well, across both sectors, with “a weakening demand environment contributing to softer inflationary pressures in September”.

Across Euro area regions:

France: The French composite flash PMI fell by 5.7pt to 47.4 in September, notably below consensus and our expectations. The decline was mostly driven by the services sectors, with the index falling (by 6.7pt) to 58.3, reversing the Olympics-related August strength and falling even lower than the July reading, and by manufacturing, where the output index fell (by 1.0pt) to 42.8

Germany: The German composite flash PMI decreased by 1.2pt to 47.2 in September, below consensus and our expectations. The deceleration was broad-based across sectors, skewed towards manufacturing, where the output index fell (by 2.3pt) to 40.5, its 12-month low.

Periphery: The periphery composite PMI decreased by 0.7pt to 51.1, driven by a broad-based deceleration across sectors.

Goldman Sachs sees several main takeaways from today’s data.

First, we see a notable downside surprise in the Euro area driven not only by a big pay-back out of France, reflecting the post-Olympics adjustment, but also by pronounced weakness in Germany, and a slowing periphery. While the services sector drove the decline, manufacturing remains subdued, with Germany and France leading the area-wide deceleration in the manufacturing output.

Second, the employment numbers in the Euro area seem to exhibit continued weakness, with employment contracting for the second month in a row. We would thus watch closely the upcoming labour market releases: unemployment rate for Germany (Friday, September 27th) and the Euro area (Wednesday, October 2).

Third, the PMI price components showed benign developments this month in the Euro area, with cost pressures and prices charged declining, driven by “weakening demand”. Lastly, in the UK, despite a slight decline in the indices, activity picture remains firm, while price developments are mixed in September.

Overall, deteriorating activity in Northern Europe adds pressure on the ECB to recalibrate to easier policy, though with the cautious tone from Lagarde and others recently, the base case remains for a hold at the October meeting, with consecutive 25bp cuts thereafter.

On the Euro, after a sharp move lower in EUR/USD on today’s release, Goldman’s recently updated forecasts imply some room for further downside into year-end.