Eurozone business activity slowed as France unrest weighs

THE euro area’s private sector slowed more than expected in October, weighed down by France as the region’s No 2 economy grapples with fiscal and political tensions.

The composite purchasing managers’ index compiled by S&P Global decreased to 51.9 from 53.1 in September, though remained well above the 50 threshold separating growth from contraction.

Analysts in a Bloomberg survey had anticipated a smaller decline to 52.7.

While France performed significantly worse than expected, Germany recorded a fourth straight month above 50, underpinned by a stronger-than-anticipated performance by manufacturers.

“A key drag on growth was a renewed drop in business activity in the French service sector,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said on Friday (Oct 23), adding that this “may be linked to strikes and unrest having disrupted some local economies”.

Even so, October activity for the wider region is “among some of the best performances seen over the past three years”, he added.

The euro-area economy has shown resilience to the Iran war and the accompanying energy-price shock, which along with above-target inflation has prompted the European Central Bank (ECB) to raise interest rates twice and signal more tightening may still be needed.

There is also concern, however, that the continued fighting in the Middle East and the recent jump in bond yields will weigh on economic activity.

Officials are widely expected to keep borrowing costs unchanged at the Oct 28 to 29 meeting.

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David Powell, senior euro-area economist, said: “The composite PMI survey for the euro area suggests the bloc’s economy is beginning to weaken under the weight of higher commodity prices and tighter financial conditions.

“We think that double whammy will almost certainly cause the ECB to leave rates unchanged in October and end the hiking cycle after one final increase in December.”

Some investors and economists even see a risk that the rout in French bonds escalates into another euro-area debt crisis, with Franklin Templeton’s fixed-income investment chief on Wednesday warning it could end up being worse than the last more than a decade ago.

Turning to inflation, Williamson said input costs are rising sharply again, causing firms to push selling prices higher in order to protect margins.

“The picture of sustained growth and stubbornly elevated inflation from the October flash PMI will likely add to further speculation of more aggressive policy tightening from the ECB,” Williamson said. Higher borrowing costs have already started taking a toll by dampening demand, he added.

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 gross domestic product. BLOOMBERG