Eurozone business activity witnessed a sharp decline in October, exacerbating concerns over the region's economic outlook, as indicated by the closely monitored Purchasing Managers’ Index (PMI) survey released by S&P Global on Tuesday.
The PMI score for October plummeted to 46.5, a stark drop from the revised 47.2 recorded in September. A reading below 50 signifies a contraction in business activity, while a figure above 50 indicates growth.
Cyrus de la Rubia, Chief Economist at the Hamburg Commercial Bank, a collaborator with S&P for the PMI, commented, "In the eurozone, things are moving from bad to worse," emphasizing the grim trajectory of the economic landscape. He further noted, "We wouldn’t be caught off guard to see a mild recession in the eurozone in the second half of this year."
This lackluster reading adds mounting pressure on the European Central Bank (ECB) to reconsider its ongoing series of interest rate hikes, with the governing council set to convene in December.
Despite Eurozone inflation still exceeding the ECB's two-percent target, a surge triggered by Russia’s Ukraine incursion last year, the pace of increase is decelerating, and economic challenges are on the rise.
The PMI score has now witnessed a fifth consecutive monthly drop, registering the swiftest descent since November 2020. Data revealed that private-sector activity in the eurozone contracted at its quickest pace in a decade, excluding figures from pandemic-impacted months, with new orders experiencing a steep decline.
S&P Global highlighted, "Companies cut employment as a result, representing the first drop in headcounts since the lockdowns of early 2021," underscoring the adverse impact on the labor market. Job losses in the manufacturing sector reached their highest rate since August 2020, while hiring in the services sector stagnated.
The outlook from purchasing managers for the year ahead remained among the most subdued in the past year, with only a marginal uptick noted for October.
Though France, the second-largest economy in the eurozone, saw a slower decline in its services sector, mitigating a sharper drop in manufacturing, the PMI sentiment in France and Germany, the largest economies, deteriorated more rapidly. France has now experienced five consecutive months of falling output, while Germany has witnessed four, compared to three across the eurozone as a whole.
The ECB has been incrementally tightening monetary policy over its past ten meetings, resulting in an unprecedented four percent key deposit rate. The ongoing Middle East conflict has injected further uncertainty into economic forecasts, with markets closely monitoring any indications that could lead to an escalation in oil prices.
ECB President Christine Lagarde acknowledged the challenges faced by households due to the assertive rate hikes, urging caution against premature easing. Analysts anticipate a temporary pause in rate hikes, with the expectation that the monetary policy will remain stringent in the foreseeable future.
Consumer prices in the 20-nation currency bloc rose at an annual rate of 4.3 percent in September, marking its lowest level in nearly two years. The International Monetary Fund adjusted its forecast for Germany earlier this month, projecting a contraction of 0.5 percent in 2023, while anticipating a meager 0.7-percent growth for the eurozone as a whole.
