(Bloomberg) -- Business activity in the euro area’s two biggest economies kept shrinking this month, though signs of life in Germany could herald a return to growth this quarter.
The contraction in that country’s private sector eased in October, with a flash Purchasing Manager Index by S&P Global rising to 48.4 from 47.5 the previous month. While that’s still below the 50 mark separating expansion from contraction, it exceeded the minor uptick predicted by economists in a Bloomberg survey.
“The start to the fourth quarter is better than expected,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said in a statement. “With services growing at a faster pace and manufacturing shrinking not as quickly as in the previous month, growth in the fourth quarter is a distinctive possibility.”
France’s downturn, by contrast, intensified due to a “sharp and accelerated decrease” in demand that was more pronounced in manufacturing than in services, S&P Global said. The PMI gauge slipped to 47.3 from 48.6, while analysts had forecast an improvement.
The two countries are seen as the main culprits of a broader slowdown in the euro region that already pushed the European Central Bank to accelerate monetary easing last week.
Traders edged up loosening bets on Thursday, pricing a roughly 50% chance of a half-point cut at the ECB’s next meeting in December.
The manufacturing sector has long reeled from a combination of soft demand in key export markets like China and structural problems at home - including high energy costs and uncertain politics. While that weakness looked to be spreading to services in recent months, at least in Germany the sector resumed its role of propping up the overall economy this month.
In France, the situation in that part of the economy worsened further from September, when the PMI index already dropped after the end of the Summer Olympics that had provided a temporary boost. The government is also planning to raise taxes and cut spending in order to rein in its budget deficit.
“France remains trapped in economic decline as the fourth quarter begins, with the challenges from the third quarter persisting,” said Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, an economist at Hamburg Commercial Bank. “Despite early elections four months ago, uncertainty continues to loom over the economic outlook.”
The data will be scrutinized by ECB officials who’re debating the path ahead for interest rates. The PMI releases are the first major piece of information to arrive after last week’s decision to lower borrowing costs for the third time this year.
The economic weakness has prompted investors to speculate that officials might have to go for a bigger cut in the December meeting. Some officials have been particularly worried about the labor market, where early signs point to a softening of demand.
Employment in Germany fell at the fastest pace since June 2020, S&P Global said, though headcount reductions in France were only “marginal.”
PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.
Elsewhere, releases due later are set to show composite PMIs in the US and the UK dipping a touch, though remaining comfortably above 50.
--With assistance from Joel Rinneby, Mark Evans and Aline Oyamada.
(Updates with market reaction in sixth paragraph.)
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