Euro zone factories boomed in October as Germany roared

[LONDON] Manufacturing growth in the euro zone boomed in October but the recovery from severely depressed activity at the height of the coronavirus pandemic was again mostly driven by a buoyant Germany, a survey showed.

Also likely of concern to policymakers, and highlighting a further divergence in the recovery, a flash reading of the overall survey showed activity in the bloc's dominant service industry contracted last month as a second wave of the virus swept across Europe.

As the virus resurges, Germany and France - the bloc's two biggest economies - have again imposed tough lockdown measures, likely dealing a further heavy blow this month as restaurants, gyms and shops stay closed.

Still, IHS Markit's final Manufacturing Purchasing Managers' Index climbed to 54.8 in October from September's 53.7, its highest reading since July 2018 and ahead of the 54.4 flash estimate. Anything above 50 indicates growth.

An index measuring output, which feeds into a Composite PMI due on Wednesday and is seen as a good gauge of economic health, bounced to 58.4 from 57.1 in September, comfortably beating its 57.8 flash reading.

"Germany has done spectacularly well over recent months but as the lockdowns begins to impact not only on Germany but its main export market it will take the edge off the recovery," said Peter Dixon at Commerzbank.

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"The fourth quarter for the euro zone as a whole is going to look pretty grim, we are still working through our numbers but it won't be good." German factories saw record growth in new orders in October but it has recently imposed controls almost as strict as the lockdowns of the first phase of the crisis suggesting at least some of that manufacturing activity might be curtailed.

Manufacturing activity in France strengthened slightly although its new lockdown will also likely hit the sector soon.

In Britain, outside the currency union and due to go under its own second lockdown from Thursday, factories lost more momentum, especially among consumer goods makers, adding to signs of a slowdown in the economy as coronavirus cases mount again.

It was a similar picture in central Europe, as economies there posted improved activity, with employment rising, but lockdown measures and a fast spread of infections foreshadowing a slowdown.

There is a high risk the resurgence in coronavirus now underway across Europe would halt the nascent euro zone recovery, a recent Reuters poll showed.

The euro zone economy contracted 11.8 per cent in the second quarter, when many businesses were closed and citizens urged to stay home. But it expanded a much-better-than-expected 12.7 per cent last quarter after many lockdown restrictions were eased, official data showed on Friday.

Demand soared in October and factories were able to build up a healthy backlog of work. Optimism waned, however, and as in every month since May 2019, headcount was reduced, the PMI showed. The future output index fell to 62.7 from 63.8.

REUTERS