Eurozone business activity contracted more than expected in September, with declines in both services and manufacturing fueling concerns about an economic slowdown. Purchasing Managers' Index (PMI) data released today showed that Germany and France were the main drags on the contraction.

The euro continued to fall against the dollar on the news, with losses deepening. At 08:27 GMT, the euro was trading at 1.10906, down 0.0069, or 0.62%, from the previous trading day.

Composite PMI Index Lower than Expected

The preliminary HCOB composite PMI index for the eurozone compiled by S&P Global fell to 48.9 in September, down from 51.0 in August and below economists' forecasts of 50.5. This was the first contraction since February, with the index falling below the 50-point boom-bust line, indicating weakening economic activity.

The unexpected contraction reflected weakening demand in the eurozone, with new orders falling at the fastest pace in eight months. The new business index fell from 49.1 to 47.2, further highlighting the severity of the economic slowdown. "Given the backlog of orders and the decline in new business data, it doesn't take much imagination to see further weakness in the economy ahead," said Cyrus de la Rubia, chief economist at Hamburger Commerzbank.

Service Sector Shows Weakness

The service sector, which once performed relatively well, is also beginning to show pressure. The service sector PMI fell sharply from 52.9 to 50.5, lower than the expected 52.1, indicating that the sector is approaching stagnation. Although inflationary pressures in the service sector have eased, with the output price index falling from 53.7 to 52.0, this has not offset the overall economic downturn.

"The European Central Bank is closely watching the continued high inflation in the service sector, and the news of slowing input and output price inflation is undoubtedly positive," de la Rubia added. However, the slowdown in inflation is not enough to boost business activity.

Manufacturing Still Struggles

The eurozone's manufacturing sector continues to be in a state of contraction, with the PMI falling further from 45.8 to 44.8. The output index also fell to 44.5, showing the continued challenges facing factories. Business optimism in the manufacturing sector fell to an 11-month low, with the factory future output index plunging from 57.5 to 52.0, reflecting low expectations for a near-term recovery.

Germany, the eurozone's largest economy, continues to bear the weight of a manufacturing slump, while France has relapsed into contraction after a brief boost from the August Olympics.

Market Outlook Bearish

Given the unexpected contraction in business activity and the decline in optimism, the eurozone's near-term economic outlook appears pessimistic. PMI data point to weakening demand for services and manufacturing, and the European Central Bank's recent rate cut may not be enough to reverse the trend.

With new orders falling rapidly and no signs of recovery in the manufacturing sector, the eurozone economy may face further stagnation in the coming months. Traders should be prepared for potential downside risks as the region struggles under the dual pressures of persistent inflation and slowing growth.