Market Analysis

Image Credits: Bloomberg

Business activity in the euro area’s largest economies continued to decline this month, but signs of improvement in Germany may indicate a potential return to growth in the current quarter.

In Germany, the contraction in the private sector eased in October, with the flash Purchasing Managers' Index (PMI) from S&P Global rising to 48.4 from 47.5 the previous month. While still below the 50 mark that separates growth from contraction, this increase surpassed the slight uptick anticipated by economists in a Bloomberg survey.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, commented, “The start to the fourth quarter is better than expected. With services expanding more rapidly and manufacturing contracting at a slower pace than last month, growth in the fourth quarter is a distinct possibility.”

In contrast, France experienced a deepening downturn, driven by a "sharp and accelerated decrease" in demand, particularly in the manufacturing sector. The PMI index fell to 47.3 from 48.6, defying expectations for an improvement.

Both Germany and France are viewed as key contributors to a broader slowdown in the euro region, which prompted the European Central Bank to expedite monetary easing last week. On Thursday, traders increased bets on potential rate cuts, assigning about a 50% chance of a half-point reduction at the ECB's upcoming meeting in December.

The manufacturing sector has been struggling due to weak demand in major export markets like China and domestic issues such as high energy costs and political uncertainty. Although this weakness had started to affect services, Germany’s services sector showed resilience this month.

In France, the economic landscape worsened further following a drop in the PMI index in September, which had already declined after the Summer Olympics, which had provided a temporary boost. The government is also planning tax increases and spending cuts to address its budget deficit.

“France remains caught in economic decline as the fourth quarter begins, with the challenges from the third quarter persisting,” said Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank. “Despite early elections four months ago, uncertainty continues to hang over the economic outlook.”

ECB officials will closely analyze this data as they consider future interest rate decisions. These PMI figures are the first significant data to emerge after last week’s decision to cut borrowing costs for the third time this year.

Economic weakness has led investors to speculate that a more substantial rate cut may be necessary in December. Some officials are particularly concerned about the labor market, where initial signs indicate a softening demand. 

S&P Global reported that employment in Germany fell at its fastest rate since June 2020, while headcount reductions in France were described as only “marginal.”

PMIs are closely monitored by markets because they are released early in the month and effectively highlight trends and potential turning points in the economy. Although they provide insight into the breadth of changes in output rather than the depth, these business surveys can sometimes be challenging to directly correlate with quarterly GDP figures.

Later releases are expected to show composite PMIs in the US and the UK dipping slightly, but remaining well above the 50 mark.

Paraphrasing text from "Bloomberg" all rights reserved by the original author.