Eurozone business growth slowed in October, prices skyrocketed -PMI

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The skyline with its financial district is pictured at sunset as the spread of coronavirus disease (COVID-19) continues in Frankfurt, Germany, October 26, 2020, REUTERS / Kai Pfaffenbach / File Photo

LONDON, Oct. 22 (Reuters) – Growth in euro area business activity slowed this month as companies faced soaring costs due to supply chain constraints, while the The bloc’s dominant service industry was struggling over lingering concerns over COVID-19, an investigation found on Friday.

The IHS Markit Flash Composite Purchasing Managers Index (PMI), a good indicator of overall economic health, fell to a six-month low of 54.3 in October from 56.2 in September.

That matched the lower forecast of a Reuters poll that predicted a more modest drop to 55.2 but was still comfortably above the 50 mark that separates growth from contraction.

“The October PMIs are consistent with our view that economic growth in the euro area will slow significantly in the fourth quarter and that inflation will rise further in the months to come,” said Jack Allen-Reynolds of Capital Economics.

Supply chain bottlenecks caused by the coronavirus pandemic, along with a shortage of heavy truck drivers, caused the input price index to drop from 70.9 to 73.1, by far the highest since the survey began in mid-1998.

Business growth slowed in Germany, Europe’s largest economy, while in France an expansion in the dominant service sector was offset by weakness in manufacturers as supply chain problems had an impact on the business.

In Britain, outside the eurozone, the economy has unexpectedly picked up momentum, although cost pressures rising the most there in more than 25 years could prompt the Bank of England to raise interest rates for the first time since the pandemic.

The BoE is expected to become the first major central bank to raise interest rates in the post-pandemic cycle, a recent Reuters poll found, but economists believed the first hike would not come until early next year, later than the markets expect.

PRICE PRESSURE

A PMI for the eurozone services industry fell to 54.7 from 56.4, its lowest since April, and below the 55.5 Reuters poll forecast.

But companies have been hiring staff at the fastest pace in over 14 years. The employment index fell from 54.1 to 56.0.

Manufacturing activity remained robust and the factory PMI fell only from 58.6 to 58.5 in September, although an index measuring output, which feeds the composite PMI, fell to 53.2 vs. 55.6, its lowest since June 2020.

The prices of raw materials that factories need have been rising at an all-time high, and while manufacturers have shifted some of those costs to customers, they have not been able to shift the full burden. The producer price index rose from 70.4 to 72.3, its highest level since IHS Markit started collecting data in late 2002.

This suggests that the recent spike in inflation will not dissipate anytime soon, raising question marks over the European Central Bank’s view that the recovery will be transitory.

“The combination of slower growth and inflationary pressure could exacerbate divisions within the ECB’s Governing Council ahead of next week’s policy meeting, although the December meeting remains the one to watch “said Hussain Mehdi of HSBC Asset Management.

Reporting by Jonathan Cable; Editing by Hugh Lawson

Our Standards: Thomson Reuters Trust Principles.


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