Eurozone growth slows to a six-month low

Economic growth in the Eurozone hit a six-month low in October, a widely-watched survey showed on Thursday, as supply issues and rising Covid-19 cases hampered the recovery.

The IHS Markit Eurozone PMI composite output index fell to 54.2 last month, compared to 56.2 in September. It was the lowest reading for six months and the third successive slowdown following a 15-year high in July. It was also marginally below consensus expectations of for 54.3.

Both manufacturers and service providers reported a slowdown, with the IHS Markit Eurozone PMI services business activity index hitting a six-month low of 54.6 against 56.4 in September.

The biggest contributing factor for both sectors was supply-side constraints, which in turn fuelled inflationary pressures. Both input costs and output prices rose at record rates, IHS Markit noted.

Among individual countries, Germany’s composite PMI was 52.0, an eight-month low, while France eased to a six-month low of 54.7.

Spain and Italy were also lower, at 56.2 and 54.2 respectively, but Ireland strengthened to 62.5.

Chris Williamson, chief business economist at IHS Markit, said: "Eurozone growth has slowed sharply at the start of the fourth quarter, with manufacturing hamstrung by supply constraints and services losing momentum as the rebound from lockdown fades.

"Despite the slowdown, the rate of expansion remains consistent with quarterly GDP growth of 0.5%, but there’s a worrying lack of clarity on the direction of travel in coming months.

"With supply shortages getting worse rather than better in October, manufacturing growth is likely to remain subdued for some time to come. That would leave the economy reliant on the service sector to drive growth, and there are already signs that rising virus case numbers are dampening activity in many service sector businesses."

Mateusz Urban, economist at Oxford Economics, said: "A fall in the services sub-index was responsible for most of the fall in the composite PMI, whereas the index for manufacturing dropped only slightly over the month.

"Notably, producers reported mounting backlogs due to input shortages, especially in the auto sector, as well as unabating price pressures, which are being increasingly passed on to their clients. The results indicate that growth in the Eurozone is cooling over the fourth quarter, and price pressures remain acute, posing a communication challenge for the European Central Bank."

Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said: "The final composite PMI shows that the recovery was fast losing steam heading in the fourth quarter, and the detail shows that the rise in virus cases in some countries is already dampening activity.

"Both manufacturing and services firms were struggling to get the inputs they need in October, and this fuelled a continued rise in price pressures. This suggests that the risks to our inflation forecasts, which we recently raised, remain to the upside.

"Looking ahead, the Eurozone composite PMI will likely soften further between now and the end of the year, as the energy crunch, ongoing supply constraints and slowdown in China weigh on output. And if virus cases continue to rise, our GDP forecast may need to come down."

The Eurozone composite PMI is based on original survey data collected from a representative panel of around 5,000 manufacturing and services firms. A reading above 50.0 indicates growth, while a reading below 50.0 suggests contraction.