Private sector activity in the eurozone slowed more than expected in October, with France emerging as the main drag, as the bloc's second-largest economy finds itself mired in fiscal and political tensions.
The composite purchasing managers' index compiled by S&P Global fell to 51.9 from 53.1 in September, though it remained well above the 50 threshold that separates growth from contraction. Analysts surveyed had anticipated a milder decline to 52.7.
France performed significantly worse than expected, while Germany held above 50 for a fourth consecutive month, supported by stronger-than-anticipated manufacturing performance. Chris Williamson, chief business economist at S&P Global Market Intelligence, said "a key drag on growth was a renewed decline in French service sector business activity," adding that this "may be related to strikes and unrest disrupting some local economies."
Even so, he added, economic activity across the eurozone in October remained "among the best seen over the past three years."
The eurozone economy has demonstrated resilience to the Iran war and the resulting energy price shock, which, together with above-target inflation, has prompted the European Central Bank to raise rates twice and signal that further tightening may still be needed. However, markets are also concerned that the ongoing Middle East conflict and the recent jump in bond yields will weigh on economic activity. Officials are widely expected to keep borrowing costs unchanged next week.
"The eurozone composite PMI survey suggests that the region's economy is starting to weaken under the weight of higher commodity prices and tighter financial conditions," said David Powell, senior eurozone economist. "We believe this double blow will almost certainly keep the ECB on hold in October and deliver one final rate hike in December before ending this tightening cycle."
Some investors and economists even believe the sell-off in French bonds risks escalating into another eurozone debt crisis, with Franklin Templeton's head of fixed income investing warning on Wednesday that it could ultimately prove more severe than the crisis of more than a decade ago.
Turning to inflation, Williamson said input costs rose sharply again, pushing companies to raise selling prices to protect profit margins. "The picture of 'persistent growth and stubbornly high inflation' presented by the October flash PMI may further fuel market speculation about more aggressive ECB tightening," Williamson said, adding that higher borrowing costs have already begun to take effect by dampening demand.
PMIs are closely watched by markets for being released at the start of each month and for their ability to reveal economic trends and turning points. As a measure of the breadth, rather than depth, of output changes, business surveys can sometimes be difficult to map directly onto quarterly GDP.
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