Euro Area: Business activity growth cools further in October as supply shortages and elevated inflation continue to bite

Euro Area PMI October 2021

Euro Area: Business activity growth cools further in October as supply shortages and elevated inflation continue to bite

The flash Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, dropped to 54.3 in October from 56.2 in September, marking a six-month low and coming in below market analysts’ expectations. However, the index remained above the 50-threshold that distinguishes expanding from contracting activity in the private sector.

Although both sectors remained in expansionary territory in October, activity increased at the slowest pace in 16 months in the manufacturing sector and at the weakest pace in six months in the services sector, amid prolonged supply constraints. Meanwhile, new orders continued to expand at a healthy pace, while the pace of job creation accelerated as firms struggled to clear backlogs.

On the price front, input costs soared at the fastest pace on record amid ongoing supply shortages and another sharp rise in backlogs of uncompleted work. This translated into the quickest increase in output prices in nearly two decades. Lastly, business optimism weakened for the fourth consecutive month—reaching its lowest level since February—largely due to concerns over the impact of the pandemic on supply chains, which weighed on confidence within the manufacturing sector.

Assessing the Eurozone’s two largest economies, growth in business activity cooled in both France and Germany, although it slowed the most in the latter.

Commenting on the release, Chris Williamson, chief business economist at IHS Markit, said:

“A sharp slowdown in October means the Eurozone starts the fourth quarter with the weakest growth momentum since April. […] While the overall rate of economic growth remains above the long-run average for now, risks seem tilted to the downside for the near term as the pandemic continues to disrupt economies and push prices higher. After strong second and third quarter expansions, GDP growth is looking much weaker by comparison in the fourth quarter.”

Meanwhile, Bert Colijn, senior Eurozone economist at ING, stated:

“The pace of the October decline does give a rather unsettling feeling that shortages in the economy are starting to bite more seriously than initially expected. […] The main concern that the PMI flags is the unabating price pressures that continue to work their way through to the consumer. The survey indicates a record high of businesses increasing their consumer prices, which adds to concerns about how temporary inflation will actually be. Similarly, job market developments continue to be very favourable, which adds to expectations of a rebound in wage growth.”

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