Much like the German reading, the headline is a 26-month low print even if manufacturing output was seen at a 2-month high. New orders declined sharply and manufacturers also cut their buying activity back further in response to the darkening economic outlook. The bright spot is that cost inflation is seen coming down and that is a bit of a relief after the historic highs seen during the middle of the year. S&P Global notes that:

“The euro area’s beleaguered manufacturers reported a further steep drop in production in August, meaning output has now fallen for three successive months to add to the likelihood of GDP falling in the third quarter. Forwardlooking indicators suggest that the downturn is likely to intensify – potentially markedly – in coming months, meaning recession risks have risen.

“Falling sales have not only led increasing numbers of factories to cut production, but have also meant warehouses are filling with unsold stock to a degree unprecedented in the survey’s 25-year history. Similarly, raw material inventories are accumulating due to the sudden and unexpected drop in production volumes.

“Weak demand and efforts to reduce high inventory levels are therefore combining to drive production lower in the months ahead. The orders-to-inventory ratio – an important indicator of future production – is in fact now signalling a downturn of an intensity not seen since 2009, barring the initial pandemic lockdown months.

“Some good news on inflation is provided by an easing in rates of increase for both factory input costs and selling prices, linked to weakened demand and fewer supply chain issues. However, the rate of inflation signalled remains elevated by historical standards, thank principally to energy, the cost and supply of which presents a major unknown for the outlook for both production and inflation in the months ahead.”