Business activity in August contracted at the fastest rate since November 2020. The final composite output index weighed in at 46.7, down 0.3 points versus its flash estimate, and nearly two full points short of July's final 48.6.

The negative headline revision was in part attributable to a weaker service sector, where the 48.3 flash PMI was trimmed to 47.9, a 30-month low and 3.0 points below its final level at the beginning of the quarter. New business fell for a second consecutive month and at the fastest rate since February 2021 with export demand particularly soft. Backlogs saw their steepest decline in two-and-a-half years and headcount expanded by the least since February 2021. Looking ahead, business expectations remained positive but only unchanged from the 2023 low posted in July. Meantime, input costs rose at the fastest rate in three months and so remained well above their long-run average, albeit well down on the record highs seen in 2022. Output price inflation eased to a 23-month low but was similarly historically very robust.

In terms of national composite output indices, the best performing country was Ireland (52.6) which was the only member state above the 50-expansion threshold. Spain (48.6) and Italy (48.2) both saw 10-month lows, while France (46.0) hit a 33-month trough and Germany (44.6) its weakest mark in more than three years.

The combination of declining demand and output but still strong inflation pressures will not go down well at the ECB. However, for most Governing Council members it is likely to be inflation worries that dominate so, on balance, another 25 basis point hike in key interest rates next week is still a very real possibility. Today's update leaves both the ECDI (minus 31) and ECDI-P (minus 41) deep in negative surprise territory and so indicative of overall economic activity underperforming market expectations by some distance.

No revisions are expected to the flash data leaving the composite output index at 47.0 and the services PMI at 48.3.

The Composite Purchasing Managers' Index (PMI) provides an estimate of private sector output for the preceding month by combining information obtained from surveys of the manufacturing and service sectors of the economy. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) output versus the previous month and the closer to 100 (zero) the faster is output growing (contracting). The report also contains the final estimate of the services PMI. The data are provided by S&P Global using a representative sample of around 5,000 manufacturing and services companies, the former including Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece and the latter Germany, France, Italy, Spain and the Republic of Ireland.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.