Eurozone business activity contracts again, but Germany improves

The eurozone’s private sector contracted for the second consecutive month in October, with the PMI rising slightly to 49.7. Services slowed more than expected, and manufacturing remained in contraction. Germany showed improvement, but France worsened significantly.

According to the Flash Eurozone Composite Purchasing Managers’ Index (PMI), business output edged up from 49.6 in September to 49.7 in October, though it fell short of the expected 49.8. Any reading below 50 indicates contraction in output. 

Expansion in services slows more than expected, manufacturing remains in contraction

The services sector saw only a slight easing in expansion, with the PMI for services falling marginally to 51.2 from 51.4 in September, missing the expected 51.5. 

Meanwhile, the contraction in the manufacturing sector softened, with the manufacturing PMI improving to 45.9, up from 45, and better than the predicted 45.3. 

New orders continued to decline for the fifth month running, and the downturn was almost identical in pace to that seen in September. International demand remained weak, as export orders fell at one of the fastest rates this year.

Businesses responded to the challenging conditions by scaling back purchasing activities and reducing both their inventories of raw materials and finished goods.

Employment figures also reflected the economic strain, as firms in the eurozone reduced workforce numbers for the third consecutive month. The decline in employment was the fastest since late 2020, highlighting the difficulties businesses face in sustaining staffing levels.

Germany and France: Diverging fortunes

Germany, the eurozone’s largest economy, provided some positive news. 

The country’s services sector outperformed expectations (51.4 vs 50.6), while the rate of decline in manufacturing also eased (42.6 vs 40.8). 

In contrast, business conditions in France took a notable turn for the worse. 

The French services sector recorded its steepest decline since March, and manufacturing output shrank more sharply than anticipated. The Flash France Composite PMI dropped to 47.3 in October, down from 48.6 the previous month, well below expectations of 49.

Weak demand was a significant factor behind France’s poor performance. Respondents highlighted subdued consumer and business demand, while job cuts were noted in both the services and manufacturing sectors for the first time in almost four years.

Expert commentary

“The eurozone is stuck in a bit of a rut, with the economy contracting marginally for the second month running. The ongoing slump in manufacturing is being mostly balanced out by small gains in the service sector,” commented Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

Dr. de la Rubia added: “The start to the fourth quarter was better than expected for Germany. Even so, GDP may stay flat for the whole year as forecasted by the International Monetary Fund in its latest projection, after a 0.3% decline in 2023. The survey figures deliver tentative signs that we may start to see light at the end of the tunnel in manufacturing.”

On France’s outlook, de la Rubia said: “The French industrial sector remains mired in a deep crisis. Both domestic and international order volumes show no signs of recovery. Particularly worrying is the further drop in expected output for the next twelve months.”

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Implications for the ECB

the data presents a challenge for the European Central Bank (ECB). While inflationary pressures in the manufacturing sector appear to be easing, the services sector is still facing elevated costs, largely due to wage pressures.

“This backs the idea that the ECB is likely to cut key interest rates by just 25 basis points in December, rather than the 50 basis points some have been talking about,” de la Rubia suggested.

Market reactions

The euro edged up by 0.2% on Thursday, trading at $1.08, reversing three days of losses. However, the currency remains on track for its fifth consecutive week of declines.

Sovereign bond yields in the eurozone declined, with German Bund yields falling by four basis points to 2.28%. Similar declines were seen in France and Italy, where OAT and BTP yields dipped to 3% and 3.48%, respectively. Spanish Bonos fell by six basis points to 2.97%, eliminating the yield spread with France for the first time since early 2008.

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European equities rallied, with the Euro Stoxx 50 gaining 0.7%. Car makers were the top performers, led by Renault, whose shares surged nearly 7% following a third-quarter sales beat and positive fourth-quarter guidance.

The CAC 40 index rose by 0.7%, buoyed by gains in luxury stocks, with LVMH and Kering up 2.9% and 2.6%, respectively.

In Germany, the DAX increased by 0.6%, driven by a 4% jump in Volkswagen shares, while BMW and Mercedes-Benz both rose around 3%. Italy’s FTSE MIB and Spain’s IBEX 35 advanced 0.3%. 

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