Eurozone business activity contracts for fifth consecutive month

Business activity in the eurozone has contracted for the fifth consecutive month but there were signs of improvement in confidence as supply chain constraints and price pressures eased, according to a survey of companies.

S&P Global’s flash eurozone composite purchasing managers’ index, an important gauge of business conditions, rose 0.5 points to 47.8 in November, but still indicated the second-biggest decline in companies’ activity for nine years excluding coronavirus lockdown periods. A reading below 50 indicates contraction rather than growth.

The outcome of the survey was less gloomy than expected by economists polled by Reuters, who had forecast a decline in the index to 47. Businesses reported an easing of supply constraints and cost pressures and a more upbeat view about the year ahead. The rate of decline eased markedly among manufacturers in Germany, the eurozone’s biggest economy.

But the survey also recorded falling factory output, declining new orders and slowing employment growth in another signal that eurozone economic output is expected to contract this winter.

“A recession, therefore, looks likely, though the latest data provide hope that the scale of the downturn may not be as severe as previously feared,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. The data pointed to a 0.2 per cent decline in eurozone gross domestic product in the fourth quarter, from the previous quarter, he said.

Line chart of eurozone purchasing managers’ index showing declining business activity points to another recession

Signs of an easing in supply chain constraints and a cooling of producer price pressures could “take some pressure off” the European Central Bank as its policymakers weighed how much further to raise interest rates to tame record eurozone inflation, he added.

Most economists think the eurozone has already entered a technical recession, defined as two consecutive quarters of falling output. But they expect the downturn to be shallower than initially feared after a fall in energy prices and an easing of concerns about gas shortages.

Manufacturers reported a sixth successive monthly fall in factory output, but said supply chain delays eased and cost increases were slowing. Services companies said their monthly output declined for the fourth consecutive month. Overall job growth was the weakest since March 2021.

“The rate of decline in new orders slowed, while supply constraints eased — supplier delivery times lengthened to the lowest extent since August 2020 — leading to a fifth fall in backlogs of work which was also the sharpest in two years,” said Melanie Debono, an economist at Pantheon Macroeconomics.

Businesses’ costs increased at the slowest rate for 14 months, allowing them to raise prices for their customers at a more moderate rate, “albeit with rates of inflation remaining elevated”, said S&P Global. German factories reported their first reduction in supplier delays since July 2020.

“There is scope for increased equipment availability to feed through to higher car production in particular, which could mean that the industrial downturn in the fourth quarter is not as deep as we have assumed,” said Jack-Allen Reynolds, an economist at Capital Economics.

Though businesses in Germany reported the steepest contraction in eurozone activity, the rate of decline eased as its PMI score rose to a three-month high of 46.4. The contraction of French business activity deepened, however, as its PMI score dropped more than expected to a 21-month low of 48.8.

Business activity also continued to decline in the UK, where the S&P Global/Cips UK composite PMI was largely unchanged in November at 48.3, pointing to a deepening recession that is forecast to last more than a year.