Eurozone PMIs signal marked contraction in GDP and lower inflation
The flash estimates of the eurozone PMIs for October came in weaker than expected. The Composite PMI fell from 47.2 in September to 46.5 in October, signalling a marked contraction in GDP. The details of the report showed that the economic weakness has started to hurt the labour market and that price pressures continue to fall.
The flash estimates of the eurozone PMIs for October came in weaker than expected. The Composite PMI (the weighted average of manufacturing and services) fell from 47.2 in September to 46.5 in October, reaching its lowest level since November 2020. Both the Manufacturing PMI and the Services PMI declined in October (from 43.4 to 43.0 and from 48.7 to 47.8, respectively) and moved further into contraction territory. The forward looking new orders component of the Manufacturing PMI and new business component of the Services PMI also both declined in October, boding ill for activity moving into the final months of this year.
The details of the composite PMI showed that the economic weakness since the middle of 2022 has started to hurt the labour market, albeit with a longer than normal lag due to labour market tightness after the pandemic. Indeed, the employment component of the composite PMI fell from 50.8 in September to 49.4 in October, a level that is consistent with moderately contracting employment. Lower levels of employment should result in lower wage growth and, therefore, reduce underlying inflationary pressures in the end. Still, the PMI report also contained some shorter-term indicators suggesting declining price pressures, with the output price index in manufacturing well below the level of 50 that separates rises from falls in October (46.1, slightly higher than 45.8 in September). Although the output price index in services still was above 50 in October (i.e. 54.3), it stayed on the downward trajectory that started around the end of 2022. Summing up, at its current level the composite PMI is signalling a contraction of GDP of around 0.2-0.4% qoq, which would be a bit weaker than our base case for the eurozone economy (we have pencilled in -0.1% qoq for 2023Q3 and -0.2% for Q4), implying that the risks to our forecasts seem tilted to the downside. The PMIs also clearly signals further declines in inflation in the coming months, which is in line with our base case.