Private sector activity in the euro area contracted slightly in October, marking the second consecutive month of decline.
advertisementThe euro area private sector contracted for the second consecutive month in October, with the PMI slightly rising to 49.7. The service industry slowed more than expected, and the manufacturing industry continued to contract. Germany showed improvement, while France significantly worsened.
According to the preliminary Eurozone Purchasing Managers' Index (PMI), business production rose slightly from 49.6 in September to 49.7 in October, but fell short of the expected 49.8. A reading below 50 indicates a reduction in production.
Services expansion slows more than expected, manufacturing industry continues to contract
Expansion in the services sector slowed only slightly, with the services sector PMI falling slightly to 51.2 from 51.4 in September, falling short of the expected 51.5.
Meanwhile, the contraction in the manufacturing sector slowed, with the manufacturing PMI rising to 45.9 from 45 and above the expected 45.3.
New orders have fallen for the fifth consecutive month, with the pace of decline being about the same as in September. International demand remained weak as export orders fell at the fastest pace this year.
Companies responded to this difficult situation by reducing purchasing activities and reducing both raw material and finished goods inventories.
Employment data also reflects economic strains, as companies in the euro zone cut staff numbers for the third month in a row. The decline in jobs was the fastest since the end of 2020, underscoring the difficulties companies face in maintaining staffing levels.
Germany and France: divergent destinies
Germany, the euro zone's largest economy, provided positive news.
The country's services sector exceeded expectations (51.4 vs. 50.6), and the rate of decline in manufacturing also eased (42.6 vs. 40.8).
In contrast, France's economy deteriorated significantly.
France's services sector recorded its sharpest decline since March, and manufacturing production also contracted more sharply than expected. France's composite PMI for October was 47.3, down from 48.6 the previous month and well below the expected 49.
A major factor in France's poor performance was sluggish demand. Respondents highlighted weaker consumer and business demand, while pointing to layoffs in both the services and manufacturing sectors for the first time in nearly four years.
Expert commentary
Dr Cyrus de la Rubia said: “The eurozone is stuck in a bit of a rut, with the economy contracting slightly for two consecutive months. It's almost canceled out.” Chief Economist of Hamburg Commercial Bank.
Dr. Della Rubia added: “The start of the fourth quarter was better than expected for Germany. Still, GDP could remain flat throughout the year, as the International Monetary Fund predicted in its latest forecast. GDP “This comes after a 0.3% decline,” he added. 2023. The survey results provide preliminary signs that there may be light at the end of the tunnel for the manufacturing industry. ”
Commenting on the outlook for France, Mr. Della Rubia said, “The French industrial sector remains in deep crisis. Domestic and international order volumes show no signs of recovery.'' Of particular concern is the outlook for the next 12 months. “The expected production volume will further decline.”
advertisementImpact on the ECB
This data poses a challenge for the European Central Bank (ECB). Inflationary pressures in manufacturing appear to be easing, but services continue to face rising costs, primarily due to wage pressures.
“This supports the idea that the ECB is likely to cut key interest rates by just 25 basis points in December, rather than 50 basis points as some have suggested,” Dell'Albia suggested.
market reaction
On Thursday, the euro rose 0.2% to trade at $1.08, reversing three days of losses. However, the currency continues to trend downward for the fifth consecutive week.
Eurozone government bond yields fell, with German Bundestag yields dropping 4 basis points to 2.28%. Similar declines were seen in France and Italy, where OAT and BTP yields fell to 3% and 3.48%, respectively. Spain's Bono fell 6 basis points to 2.97%, closing the yield gap with France for the first time since early 2008.
advertisementEuropean stocks rose, with the Euro Stoxx 50 up 0.7%. Automakers led by Renault were the best performers, with shares rising nearly 7% on the back of third-quarter sales growth and a positive outlook for the fourth quarter.
The CAC40 index rose 0.7%, supported by gains in luxury goods stocks, while LVMH and Kering rose 2.9% and 2.6%, respectively.
In Germany, a 4% rise in Volkswagen shares pushed the DAX up 0.6%, while BMW and Mercedes-Benz both rose about 3%. Italy's FTSE MIB and Spain's IBEX 35 rose 0.3%.
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