Euro-Zone Private-Sector Economy Fails to Grow for Second Month

The downtrend in private-sector activity in the euro-area extended into a second month with the region's two top economies weighing on output and little sign of a recovery to come.

(Bloomberg) — The downtrend in private-sector activity in the euro-area extended into a second month with the region’s two top economies weighing on output and little sign of a recovery to come.

The composite Purchasing Managers’ Index by S&P Global inched up to 49.7 in October from 49.6 the previous month — holding just below the 50 threshold separating growth from contraction, data Thursday showed. The reading was exactly as predicted by analysts.

The results will do little to ease fears that the bloc is slipping back into stagnation after a strong start to 2024. Germany is the prime culprit as its industrial giants grapple with costlier energy and soft Chinese demand. While an uptick in its PMI measure gave hope that output can grow this quarter, France’s struggles worsened.

More broadly, a long-awaited rebound in consumption has so far failed to ignite. 

“The euro zone is stuck in a bit of a rut,” Cyrus de la Rubia, an economist at Hamburg Commercial Bank, said in a statement. “The ongoing slump in manufacturing is being mostly balanced out by small gains in the service sector,” he said, adding that “for now, it is not clear whether we will see a further deterioration or an improvement in the near future.”

The weakness has sounded alarm bells at the European Central Bank, which lowered interest rates for the third time this year last week, marking the first back-to-back cuts of the cycle. The danger is that sub-par expansion lets inflation settle below the 2% goal.

“The growth outlook has weakened quite clearly in the past few months, which could also increase disinflationary pressures,” ECB Governing Council member Olli Rehn said Tuesday in Washington. “We have to be mindful of — possibly also concerned about — the possibility of inflation undershooting.”

More support for the economy is on the way from monetary policy, according to investors in money markets who began ramping up easing bets after the euro zone’s September PMI reading fell short of expectations. They’re now pricing a spate of cuts until the deposit rate reaches 2% in mid-2025, down from 3.25% currently.

But there were signs of stubborn price pressures in S&P’s release.

“Inflation in the services sector seems likely to stay elevated, as costs and selling prices in October rose faster than the previous month,” de la Rubia said. “This is probably due to persistent wage pressure, which impacts service providers especially hard. All 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.”

Germany, where carmakers including Volkswagen AG are retrenching, saw its PMI tick up, though it remained below 50. In France, the situation deteriorated with its composite reading slipping to 47.3 — below that of its larger neighbor.

Beyond those two countries, output increased at the fastest pace in four months, S&P Global said. It cautioned, however, that firms in the euro area increasingly looked to scale back staff numbers in October as employment fell for a third month and at the fastest pace since 2020.

Companies in the service sector “are seeing fewer new orders, and the backlog of work has been shrinking for six months,” de la Rubia said. “For the first time since early-2021, service-sector hiring has almost come to a halt. The real question is whether the combination of higher wages and lower inflation can revive consumer spending, which would give service providers a much-needed boost.”

PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.

Elsewhere, releases due later are set to show composite PMIs in the US and the UK dipping a touch, though remaining comfortably above 50.