The key facts

  • The eurozone composite PMI fell in October to 51.9 from 53.1 in September — the weakest reading in four months, below the forecast (52.7).
  • The French PMI dropped to 48.4 (services — 48.4, manufacturing — 49.3); employment has been shrinking for the sixth month in a row, and companies' expectations are the lowest since April 2020.
  • The yield on French 10-year bonds reached 5.14% — the highest since 2002; the spread over German bonds widened to 170 b.p. versus 78 b.p. in early August.

France in contraction again, the eurozone slows

France's return to economic growth lasted just one month: in October business activity in the country contracted again, and companies' confidence fell to its lowest level since the first lockdowns of 2020. The eurozone composite PMI, covering manufacturing and services, fell to 51.9 from 53.1 in September — the weakest reading in four months, although the index remains above the 50 mark separating growth from contraction. Economists had expected a more moderate decline — to 52.7. The services and manufacturing indices also came in below forecasts but still point to modest growth. According to the survey, Europe's recovery is losing pace, while persistent inflation makes it difficult for the ECB to ease lending conditions.

What is happening in France

Of the eurozone's two largest economies, France showed the sharpest deterioration: its composite PMI fell from 51.1 to 48.4 against a forecast of 50.5. The services index fell to 48.4, and manufacturing to 49.3, an 11-month low. Companies report that clients are postponing projects and spending decisions; new orders are falling at the fastest pace since May, and exports have been declining for the 11th month in a row. Businesses have been cutting headcount for the sixth consecutive month — mainly by leaving vacancies unfilled and letting temporary contracts expire. Expectations for the next 12 months fell to their lowest since April 2020, and the survey for the first time in almost two years recorded negative expectations. Joe Hayes, Senior Principal Economist at S&P Global Market Intelligence, linked the deterioration to what he said «reflects companies' concern about the highly uncertain situation surrounding the 2027 presidential election, which compounds long-standing worries about the state of French public finances». Rory Fennessy, Senior Economist at Oxford Economics, noted that «the volatile political environment and the surge in government bond yields» worsened the overall picture. Rising government borrowing costs make loans more expensive and may chill investment even without ECB rate hikes.

Germany: growth continues but slows

Germany looks encouraging, although growth slowed there too: the composite PMI fell to 52.8 from 53.8 in September (an 11-month high) against expectations of 53.3. The manufacturing PMI rose to 54.2 — a two-month high — thanks to export orders and government spending on defence and infrastructure. The services index slipped to 51.7: companies report that clients are delaying decisions and cutting spending. Phil Smith, Associate Director of Economic Research at S&P Global Market Intelligence, said the slowdown «underscores that the recovery of the eurozone's largest economy remains fragile». Manufacturers are recording the fastest rise in input costs since May — primarily for oil, raw materials and electronic components; Brent crude traded at around $114 per barrel on Friday. Manufacturers' confidence fell to its lowest since July. According to Smith, «the new surge in costs has undermined expectations in the sector».

Rising prices and the ECB

Rising costs extend beyond Germany: across the eurozone, manufacturers report higher prices for energy, fuel and transport, and supplier delivery times are lengthening at the fastest pace in four months. Chris Williamson, Chief Economist at S&P Global Market Intelligence, noted that the survey still points to quarterly GDP growth of about 0.3%, but «elevated interest rates are also starting to take their toll, dampening demand». In his view, the data «will most likely add fuel to the fire of speculation about a tighter ECB policy», meaning further increases in the cost of credit for businesses and households against a backdrop of slowing growth.

Markets under pressure

The CAC 40 index fell 0.7% on Friday morning — to around 7,750 points, more than 11% below its closing high of 10 August. Italy's FTSE MIB, after a 2.5% drop on Thursday, was almost unchanged and is also more than 10% below its August peak. The yield on French 10-year bonds reached 5.14% on Thursday — the highest since 2002 — and retreated to 5.04% on Friday. The spread over German 10-year bonds stood at 170 basis points versus 78 in early August; France now pays roughly 45 basis points more than Italy on 10-year borrowing. The euro is trading around $1.12 — more than 4% below its August high, which makes imported energy more expensive and adds inflationary pressure.

Recession or pause?

October's business surveys were disappointing but, according to Euronews, do not yet indicate that the eurozone is entering a recession. Reasons for caution remain: French companies face political uncertainty and rising borrowing costs, German manufacturers face more expensive energy, and businesses across the region report weakening demand. The ECB must decide how much it can raise the cost of credit to contain inflation without inflicting greater damage on growth. Strong September data had raised hopes of a strengthening recovery, but the October figures have called that into question — especially in France, where companies are cutting staff and reporting the most pessimistic expectations in more than six years.