Take Two: Eurozone business activity slumps; China cuts policy rates again

What do you need to know?

Eurozone business activity has fallen to its lowest level since November 2020, highlighting concerns over the impact of inflation and rising wages. A composite Purchasing Managers’ Index (PMI) flash estimate for August fell by more than expected, to 47.0 from 48.6 in July, driven by a decline in services which fell to a 30-month low of 48.3 from 50.9 – a reading below 50 indicates contraction. The manufacturing index improved slightly but remained well below 50. The fall was partly due to the steepest decline in business activity for more than three years in Germany. Meanwhile Japan’s composite PMI improved, ticking up to 52.6 from 52.2 in July.

Around the world

The New Development Bank, an institution set up by the BRICS nations of Brazil, Russia, India, China and South Africa, plans to reduce its reliance on the US dollar and issue debt in the local currencies of some of its members. President of the development bank, Dilma Rousseff, said the bank also aims to distinguish itself from the World Bank and International Monetary Fund by not setting conditions on loans. This so-called ‘de-dollarisation’ was on the agenda at the BRICS 15th summit last week, alongside discussions on expanding the alliance’s membership, with six more countries set to join next year.

Figure in focus: 3.45%

China’s central bank cut another of its main policy rates as it continues to face weakening growth. The People’s Bank of China (PBoC) reduced its one-year loan prime rate, a key rate for business loans, to 3.45% from 3.55% - the second cut in three months. However, it unexpectedly left the five-year rate, mainly used for mortgage borrowing, unchanged. The PBoC had also reduced borrowing costs on its one-year medium-term lending facility the week before, but some analysts believe the country still needs to do more to stimulate the economy, which recently slipped into deflation for the first time in more than two years.

Words of wisdom

The last mile: A term currently being used by economists to depict the final stage of the recovery from pandemic-induced inflation. The US Federal Reserve’s (Fed) battle with inflation is now targeting this ‘last mile’; some economists believe that to ease ongoing price rises and return to the central bank’s 2% target, a recession and significant job losses will be required. At the Fed’s July monetary policy meeting, officials were divided over hiking interest rates; however, they ultimately voted unanimously to raise the Federal Funds Rate by 25 basis points to between 5.25% and 5.50%.

What’s coming up

On Tuesday, Japan publishes its unemployment rate for July. On Wednesday, a spate of Eurozone surveys covering August are issued, including the bloc’s Economic and Industrial Sentiment measures. In addition, a second estimate for US second quarter (Q2) GDP growth is reported. The Eurozone’s latest inflation and unemployment numbers are published Thursday. On Friday Canada issues its own second estimate for Q2 economic growth while the US reports its job numbers for August.