Eurozone business activity stalls, manufacturing picks up steam

LONDON (ICIS)– The eurozone’s business sector stagnated in September as  a struggling services sector outweighed a recovery in the region’s manufacturing industry, according to the latest data released on Wednesday.

September’s flash composite purchasing manager’s index (PMI) reading fell to 50.1 from 51.9 in August and a three-month low, according to the release from IHS Markit.

This shows that eurozone rounded off the third quarter losing momentum with minimal growth, marginally missing the 50.0 neutral reading.

Manufacturing continued at a stronger pace than it has in recent years, with the flash sector PMI jumping to 53.7 reaching a 25-month high up from 51.7 the previous month.

This trend continued for the manufacturing PMI output index which tracked gains to 56.8 for September from 55.8 and achieving the highest reading in 31 months.

The services sector fell back into contraction for September, dropping to a four-month low of 47.6 from 50.5 in August, as infection rates began picking up across the single currency region.

The manufacturing sector grew as the number of new orders increased to their highest rate over PMI readings and GDP since February 2018 as producers catered to pent-up demand from the second quarter.

Backlogs of work fell at a reduced rate for manufacturing, indicating that capacity pressures are growing in the factory sector.

Average input prices increased for the fourth successive month at a modest incline on August’s level, but average prices charged for goods and services fell at the steepest rate since June “as firms increasingly reported the need to offer discounts to stimulate sales,” said IHS Markit.

Falling manufacturing input prices, often linked to the appreciation of the euro, were offset by a further rise in services costs attributed to protectionist costs taken to account for the impact of the virus.

“The combination of falling selling prices and rising costs indicated the greatest squeeze on companies’ margins since December 2018. “

The uptick in manufacturing was driven by Germany, Europe’s biggest economy,  with production at its strongest since January 2018.  But contraction in the services sector also slowed the rate of growth on a national level.

France marked a more tepid increase in manufacturing activity which was not enough to stem declines in the services reading, leading to the composite PMI slipping back into contraction.

Employment was cut for the seventh month in a row, which despite falling from April’s record peak is still at a higher pace than at any time since June 2013 prior to the pandemic.

Job cuts in France and Germany continued at a slower pace than the rest of the single-currency bloc, but the rate of reduction eased across the eurozone for the manufacturing sector – at its lowest rate since February.

Outside of the eurozone, the UK reflected the trend of declines on the previous month, but this was echoed in the country’s manufacturing sector.

The UK’s flash composite PMI fell to 55.7 from 59.1 (a 72-month high), with manufacturing 54.3 from 55.2 and manufacturing output at 59.3 from 61.0 for September. Employment mirrored the declines seen in the eurozone.

The slowdown in manufacturing was attributed to the catch-up effect as plants were brought back online over summer, although export sales to Asian markets remained buoyant.

Business expectations for the future are at the highest since February across both sectors for the eurozone, as disruptions from the pandemic are anticipated to ease.

Expectations also increased in the UK, but the degree of this was the lowest since May, as concerns about the coronavirus were intensified by uncertainty around Brexit.

Within UK manufacturing companies, confidence remained steady, with a 60% increase expected for output during the year ahead, while only 11% forecast a reduction.

While growth is encouraging, analysts at Oxford Economics suggest the rate is expected to continue slowing down in the fourth quarter, as an economic recovery will be shaped by how the coronavirus is dealt with.

“The fall in services sector activity is concerning, though perhaps expected against the backdrop of a deteriorating health situation and the reintroduction of some containment measures. It clearly highlights that the path of the virus itself will be a key factor determining the strength of the economic recovery over the coming months,” said Oxford Economics.

Thumbnail picture: Workers at Mercedes’ new automotive production plant  in Sindelfingen, Germany. Source: Philipp Guelland/EPA-EFE/Shutterstock