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Eurozone economic activity continued to shrink in October, a survey of purchasing managers showed, underpinning the case for another cut in interest rates by the European Central Bank by the end of the year.
At 49.7 points, the flash estimate of the composite purchasing managers’ index for October is a slight uptick on the previous month’s figure of 49.6 but still below the crucial 50-point mark that separates growth from contraction.
The October estimate of the index, which was released on Thursday, was in line with economists’ expectations and suggests that the pace of the decline in activity has slowed. Weaker activity in services — the sector’s index hit an eight-month low of 51.2 in October — was exacerbated by a manufacturing sector stuck deep in negative territory, despite an increase in its PMI to 45.9 from 45.0 in September.
“The Eurozone is stuck in a bit of a rut, with the economy contracting marginally for the second month,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which publishes the index with S&P Global. He added that the “ongoing slump” in manufacturing was partly offset by “small gains in the services sector”.
The ECB this month lowered borrowing costs for the second time in a row — and the third time this year — to 3.25 per cent, pointing to declines in inflation and growing concerns over the economic recovery. Investors and analysts expect another quarter-point rate cut in December and a series of further reductions in the first half of next year.
Several ECB policymakers have warned that the weaker-than-expected economic recovery created the risk of undershooting inflation targets over the next 18 months. The ECB is targeting an inflation rate of 2 per cent over the medium term and currently expects to reach that level in the fourth quarter of 2025. In September, annual inflation declined to 1.7 per cent, falling below the ECB’s threshold for the first time in more than three years.
De la Rubia stressed that it was unclear “whether we will see a further deterioration or an improvement in the near future”. New orders and business confidence both fell for the fifth month in a row.
The first estimate for third-quarter GDP, which will be published by Eurostat next Wednesday, will provide more clarity over the state of the Eurozone economy. Consensus data shows that analysts on average expect tepid growth of 0.2 per cent compared with the previous three-month period — the same increase as in the second quarter.
“A lot [of data] suggests that the economic development in the euro area in the second half of the year will be weak,” Commerzbank economist Vincent Stamer wrote in a note to clients after Thursday’s PMI data.
The PMI for Germany rose to 48.4 in October from 47.5, suggesting that the decline in economic activity in Europe’s largest economy has also eased.
“The October PMI data signal that German manufacturing is not in free fall any more,” said Robin Winkler, chief Germany economist at Deutsche Bank. While the German government now forecasts the country’s economy will shrink in 2024 for the second year in a row, it is not yet “a done deal that Germany is stuck in a recession”.