The eurozone’s private sector activity contracted again in October, marking its second month of decline as growth in services slowed unexpectedly and manufacturing remained in negative territory. While Germany saw modest improvements, France’s performance worsened notably.
According to the Flash Eurozone Composite Purchasing Managers’ Index (PMI), output inched up slightly from 49.6 in September to 49.7 in October, narrowly missing forecasts of 49.8. Any reading below 50 signals contraction, underscoring the region’s economic struggles.
Services and Manufacturing
The services sector showed minimal growth, with the services PMI dropping slightly to 51.2 from 51.4 in September, falling short of expectations at 51.5. Meanwhile, manufacturing showed a minor easing in its contraction, as its PMI rose to 45.9 from 45, beating the expected 45.3. However, new orders continued to decline for a fifth month, with international demand weak, as export orders experienced one of the year’s sharpest drops.
Firms across the eurozone scaled back on purchasing, reduced inventories of raw materials, and cut back on finished goods in response to muted demand. Employment figures also dropped for the third month, with the fastest rate of workforce reduction since late 2020, signaling the difficulties businesses face in maintaining staff.
Germany and France: Mixed Results
Germany, the eurozone’s largest economy, saw a slight lift as its services sector outperformed expectations (51.4 vs. 50.6), and the pace of decline in manufacturing eased (42.6 vs. 40.8). In contrast, France saw a significant downturn, with its services sector contracting at its fastest rate since March and manufacturing output shrinking more than anticipated. The Flash France Composite PMI dropped sharply to 47.3 from 48.6 in September, missing expectations of 49. Weakened demand weighed heavily on France’s performance, with consumer and business demand subdued, resulting in job cuts in both sectors for the first time in nearly four years.
Expert Insights
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, observed, “The eurozone is in a challenging phase, contracting slightly for a second month. While manufacturing continues to slump, small gains in services provide some balance.” Dr. de la Rubia added that Germany’s start to the fourth quarter was stronger than expected, though the International Monetary Fund’s projection suggests Germany’s GDP may remain flat for the year. For France, Dr. de la Rubia noted, “The French industrial sector is in a severe crisis, with both domestic and international orders showing no recovery signs, particularly worrying given the steep decline in output expectations for the next twelve months.”
Impact on ECB Policy
The latest data poses a dilemma for the European Central Bank (ECB). Although inflationary pressures are easing in manufacturing, the services sector still faces elevated costs, largely driven by wage pressures. Dr. de la Rubia indicated this could support a modest 25-basis-point rate cut by the ECB in December, rather than the 50-basis-point reduction some had anticipated.
Market Reactions
The euro rose 0.2% on Thursday to $1.08, recovering after three days of losses, though it remains on track for its fifth consecutive week of declines. Sovereign bond yields in the eurozone also dipped, with German Bund yields falling by four basis points to 2.28%. Similar declines were observed in France and Italy, while Spanish Bonos fell by six basis points to 2.97%, closing the yield spread with France for the first time since early 2008.
European equities rallied, with the Euro Stoxx 50 up 0.7%. Automakers led gains, with Renault shares soaring nearly 7% after better-than-expected third-quarter sales and strong fourth-quarter projections. The CAC 40 index rose 0.7%, driven by luxury stocks, with LVMH and Kering advancing 2.9% and 2.6%, respectively. In Germany, the DAX climbed 0.6%, led by a 4% gain in Volkswagen shares, while BMW and Mercedes-Benz each rose around 3%. Italy’s FTSE MIB and Spain’s IBEX 35 also gained 0.3%.