Euro zone growth slows as October PMI weakens

Euro zone private sector growth slowed notably in October, with the S&P Global Flash Eurozone Composite PMI Output Index falling to 51.9 from 53.1 in September. The reading marked the weakest level in four months and the lowest since June, below forecasts of 52.7. While a composite PMI above 50.0 still signals expansion, the latest data indicate a clear cooling in activity at the start of the fourth quarter.

Both major parts of the economy contributed to the slowdown. The preliminary services PMI fell to 51.7 in October from 53.0 in September, dropping from a 10‑month high to a two‑month low. The manufacturing PMI eased to 52.4 from 52.9, its lowest in three months and down from what had been the highest level in 52 months in September.

A key factor behind the weaker readings was a renewed escalation in input costs. Input prices accelerated for the second consecutive month, driven by higher energy, fuel and transport costs, in part linked to the Middle East war. The rise in manufacturing input costs was particularly sharp and represented the steepest increase since May, exceeding the average pace seen so far this year.

Despite the stronger cost pressures, firms raised their selling prices at a slower rate than in September. This combination of faster input cost growth and more moderate output price inflation implies pressure on corporate margins. The October flash PMI data therefore showed a picture of sustained but slower growth alongside stubbornly elevated inflation dynamics.

France played an outsized role in the euro zone’s loss of momentum. Its PMI pointed to an outright contraction in October, and business confidence there fell to its lowest level since 2012 outside the pandemic period. The country has been facing financial pressures and political turbulence, including social unrest and budget gridlock, which have weighed on sentiment.

French government borrowing costs have risen sharply in recent weeks amid concerns about the state of public finances, with 10‑year bond yields climbing above 5%, their highest level since 2002. A renewed drop in French services activity was a key drag on euro area growth, even as signs of softer expansion also appeared in other parts of the bloc.

The softer activity backdrop has begun to affect hiring. Overall employment growth in the euro zone came close to a standstill in October, with total employment only barely rising after slight gains in the prior two months. Services sector job creation slipped to a five‑month low, while manufacturing payrolls edged down following two months of improvement.

Higher interest rates were cited as another factor dampening demand alongside the cost shock. The October PMI readings, combining weaker growth, persistent input‑cost pressures and only gradually easing output price inflation, keep the European Central Bank’s policy dilemma in focus, as the data point to both cooling activity and still‑sticky inflationary forces across the currency bloc.