Eurozone’s economy shows ‘signs of life’, Oct PMI at 10-month high

LONDON (ICIS)–Rising order books and prices as well as strengthening employment took the eurozone’s main two economic sectors – services and manufacturing – flash purchasing managers’ index (PMI) composite to a 10-month high, driven by strong growth in Germany, analysis firm IHS Markit said on Monday.

The index stood in September at 53.7 points, up from September’s 52.6 points and the highest for 10 months.

A reading above 50.0 shows economic activity expansion while a reading below that mark would show contraction.

The PMI composite is based on both services – by far the largest part of the eurozone’s economy – and manufacturing. The flash eurozone services PMI activity index stood in October at 53.5 points, up from September’s 52.2 points, taking it to a nine-month high.

Meanwhile, the flash eurozone manufacturing PMI registered in October expansion at 53.3 points, up from 52.6 points in September, taking the index to a 30-month high.

“The eurozone economy showed renewed signs of life at the start of the fourth quarter, enjoying its strongest expansion so far this year with the promise of more to come,” said Chris Williamson, chief business economist at Markit.

“With backlogs of work accumulating at the fastest rate for over five years, business activity growth and hiring look set to accelerate further as we head towards the end of the year,” he added.

Moreover, Markit said the economy should strengthen in coming months, as faster growth of orders books and an acceleration in hiring show the positive data posted during October will not be short-lived.

“Inflationary pressures meanwhile showed signs of picking up, with the survey recording the largest increase in prices charged for over five years… with demand firming, companies were increasingly able to charge higher rates to customers. Average prices charged for goods and services rose for the first time since August 2015,” Markit said.

The increase in prices was also showed by the European statistical agency Eurostat’s latest inflation figures for September, with the rate doubling from August to 0.4%. The figure still stands far from the European Central Bank’s inflation target of close to, but below, 2%.

“Higher prices were often a reflection of the need to pass rising costs on to customers. Average input costs increased at the steepest rate for 15 months, linked mainly to higher commodity prices, notably oil-related, as well as rising wage costs,” said  Markit.

However, while the German economy gained speed in October and enters the fourth quarter in line to achieve quarterly GDP growth of 0.5%, said Markit, France’s growth may stand between 0.2% and 0.3%.

The eurozone’s GDP fourth-quarter growth is expected to stand at 0.4%.

However, France’s slower growth might be showing signs of recovering. The analysts said growth in the country’s economy in October was the second best in 2016, supported by manufacturing but somehow offset by slower rate of expansion in services.

“Although [France’s] total growth in new order inflows slowed and employment was trimmed back, backlogs of work jumped to the greatest extent since May 2011. Selling prices continued to fall, but even here there was some good news in that the rate of decline was the weakest for just over a year.”

However, the analysts said growth across the rest of the eurozone, excluding Germany and France, revived from its 21-month in September but remained one of the weakest expansions recorded in the past two years.

“Policymakers will be encouraged by signs of both stronger economic growth and rising price pressures, and the prospect of a robust fourth quarter will fuel further speculation of a possible tapering of QE purchases by the ECB,” said Williamson.

“Not only are average charges increasing at the steepest rate for just over five years, but October also saw the extent of manufacturing supply chain delays hit one of the highest in five years.

“Increasingly widespread delays suggest demand is outstripping supply for many goods, something which is usually soon followed by rising prices and investment in additional capacity.”