Survey reveals Euro zone business activity remains stagnant, stuck in a rut

Euro zone business activity remained stagnant this month, staying in contractionary territory as demand from both domestic and international markets decreased despite firms barely raising their prices, according to a survey released on Thursday.

HCOB’s preliminary composite euro zone Purchasing Managers’ Index, compiled by S&P Global, inched up to 49.7 in October from September’s 49.6 but stayed below the 50 mark that separates growth from contraction for the second consecutive month. A Reuters poll had predicted a larger increase to 49.8.

“The survey reflects a weak economic environment with slowing inflation due to weakening demand,” said Bert Colijn at ING. “The slight improvement in the PMI was mainly driven by a less severe contraction in manufacturing, which is not a cause for celebration as the manufacturing sector has been contracting since late 2022.”

Even the relatively resilient services sector saw a decline in new orders, Colijn noted. The composite new business index only slightly rose from September’s eight-month low of 47.7, reaching 47.8. The new export business reading, which includes trade among euro zone members, also remained below 50.

In Germany, Europe’s largest economy, business activity shrank in October but at a slower pace than in September, according to its PMI. In France, the second largest economy in the currency union, the services sector experienced its sharpest contraction in seven months, driven by sluggish new orders.

The PMI for the UK, which is not part of the European Union, showed businesses reporting their slowest growth in 11 months, with hiring decreasing for the first time this year due to uncertainty ahead of the Labour government’s first budget.

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Thursday’s PMI surveys were the first major indication of economic activity since the European Central Bank lowered interest rates last week for the third time this year. The central bank has acknowledged the deteriorating economic outlook, with some policymakers expressing concerns about falling below the 2% inflation target after two years of efforts to control prices.

“We believe that today’s data strengthens the case for the ECB to continue with rate cuts at the December meeting,” said Paolo Grignani at Oxford Economics. “The magnitude of the cut is still uncertain, as it is early in the quarter and there is more data to be released.”

Market expectations for another quarter-point rate cut in December align with a Reuters poll of economists. Euro zone government bond yields had slightly decreased before the data release and remained low as investors received confirmation of the region’s sluggish growth.

Despite firms only slightly raising their charges, growth in the dominant services industry in the bloc declined again, with the PMI dropping to 51.2 from 51.4, falling short of expectations for an increase to 51.5 in the Reuters poll.

The services output prices index was slightly above September’s 41-month low at 52.6. Manufacturing activity in the bloc continued to decline for over two years, although not as severely as in September. The factory PMI increased to 45.9 from 45.0, surpassing poll expectations for a more modest rise to 45.3.

An index measuring output also rose to 45.5 from 44.9. However, optimism regarding future output declined, with the future output index dropping to a 12-month low of 52.3 from 53.6.

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