Germany leads steepening eurozone downturn in October

The Eurozone economy slipped into a steeper downturn at the
start of the fourth quarter, the rate of decline hitting the
fastest since April 2013 barring pandemic lockdowns. Manufacturing,
and energy intensive sectors in particular, reported the steepest
output loss, but services activity also continued to fall at an
accelerating rate amid the ongoing cost of living crisis and
broad-based economic uncertainty.

Germany reported the steepest economic contraction while growth
in France merely stalled.

Although supply shortages showed further signs of easing,
inflationary pressures remained elevated amid high energy costs and
upward wage pressures.

Business confidence in the year ahead meanwhile remained mired
at one of the lowest levels seen over the past two years, though
steadied compared to September.

Steepening downturn

The eurozone economy looks set to contract in the fourth quarter
given the steepening loss of output and deteriorating demand
picture seen in October, adding to speculation that a recession is
looking increasingly inevitable. The S&P Global Eurozone PMI®
Composite Output Index fell from 48.1 in September to 47.1 in
October, according to the preliminary ‘flash’ reading based on
approximately 85% of usual survey responses.

The PMI has now registered below the neutral 50.0 level,
indicating falling business activity levels, for four consecutive
months. The rate of decline has accelerated over this period to
reach the fastest since November 2020. Excluding pandemic lockdown
months, the latest reading was the lowest since April 2013.

Contraction led by manufacturing, and
Germany

Manufacturing led the downturn, with factory output declining
for a fifth month running and slumping at a rate not seen prior to
the pandemic since July 2012. Service sector output also fell, down
for a third consecutive month, contracting to a degree not
witnessed outside of pandemic lockdowns since May 2013.

Any growth was confined to technology, industrial services and
pharmaceuticals & biotech firms. Some of the steepest downturns
were seen in the chemical & plastics and basic resource
sectors, often reflecting high energy dependencies.

Within the euro area, the steepest decline continued to be
recorded in Germany, where the composite PMI sank to 44.1, its
lowest since May 2020 and, excluding the pandemic, its weakest
since June 2009. Germany’s manufacturing and service sectors both
reported steep and accelerated rates of contraction.

Output meanwhile stalled in France, the composite PMI
registering 50.0 from 51.2 in September, representing the first
month in which output has failed to grow since March 2021. A modest
expansion of service sector output offset a marked (albeit
moderating) decline in manufacturing.

Elsewhere across the region, output fell for the second
successive month, dropping at the fastest rate since January 2021,
and excluding the pandemic since June 2013. A modest decline in
service sector output was accompanied by a steeper fall in factory
production.

Worse to come

While October’s headline flash PMI is consistent with GDP
falling at a modest rate of around 0.2-0.3%, demand is falling
sharply and companies are increasingly growing worried over high
inventories and weaker than expected sales, especially as winter
approaches. The risks are therefore tilted towards the downturn
accelerating towards the year-end.

New orders placed for goods and services meanwhile fell for a
fourth straight month, the rate of loss accelerating to a pace not
seen since December 2012 barring pandemic lockdown months, to
indicate a steepening downturn in demand. Excluding the pandemic,
the drop in manufacturing orders was the sharpest since April 2009,
while the decline in new business inflows into service sector
companies was the steepest since June 2013.

The drop in new orders meant companies continued to rely on
existing backlogs of work to help maintain business activity
levels, causing backlogs of orders to fall for a fourth month in a
row, led by a particularly sharp decline in manufacturing. The
backlogs decline was most marked in Germany, whereas France
reported rising outstanding business.

Business expectations for the year ahead remained subdued,
running at the second-lowest since the early pandemic lockdowns.
Confidence was especially low in manufacturing, and particularly in
Germany, reflecting concerns over energy as well as the rising cost
of living and global growth slowdowns. While sentiment picked up
slightly in the service sector from the previous month, it remained
weaker than at any other time since early-2020 and far below levels
seen earlier in the year, linked principally to concerns over the
rising cost of living and tightening financial conditions.

While employment growth ticked up slightly in October, the
latest gain was the third-lowest seen over the past
year-and-a-half, reflecting job cutting at some firms amid signs of
surplus capacity relative to sales and a broader reticence to hire
amid uncertainty regarding the outlook.

Easing supply chain delays

Although factory output was again subdued in many cases by
component shortages and concerns over energy, October saw the
overall incidence of supply chain delays ease to the lowest for
just over two years. Companies reported fewer component shortages
and improved shipping, albeit often linked to suppliers being less
busy due to weaker demand. Input buying by manufacturers fell at
one of the steepest rates seen since the global financial crisis,
reflecting lower production requirements and increasingly
broad-based deliberate inventory reduction policies amid weaker
than expected sales.

Stickier service sector prices

Although easing raw material supply constraints helped alleviate
some inflationary pressures, rising energy costs and upward wage
pressures ensured the overall rate of input cost inflation remained
highly elevated, easing only slightly from September’s three-month
high (and even increasing slightly in services).

Higher costs fed through to a stubbornly high rate of increase
of prices charged for goods and services, which dipped only
marginally compared to September to register the sixth-largest
monthly increase since comparable data were first available in
late-2002. Rates of selling price inflation cooled only marginally
in both manufacturing and services, in both cases remaining far
higher than anything ever seen prior to the pandemic.

ECB to add to economy’s headwinds

Price pressures therefore remain stubbornly elevated, as rising
energy and staff costs, and the weakened euro, offset any lowering
of commodity prices linked to improving supply conditions. As such,
the elevated survey price gauges will likely add the ECB’s resolve
to tighten policy further in the coming months despite the growing
recession risk. But there will likely also be some growing
discomfort among some policymakers regarding the economic impact of
tightening policy too aggressively in the face of other economic
headwinds.

Chris Williamson, Chief Business Economist, S&P
Global Market Intelligence

Tel: +44 207 260 2329

[email protected]

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Purchasing Managers’ Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.