France drags Eurozone PMI down to 51.9: Economic growth under pressure, European Central Bank may implement final rate hike in December

According to Jinse Finance APP, the eurozone's private sector slowed more than expected in October, with France being the main drag — this second largest economy in the eurozone is deeply mired in fiscal and political tensions.

The S&P Global Composite Purchasing Managers Index fell from 53.1 in September to 51.9, but remained well above the 50 threshold that distinguishes growth from contraction. Analysts surveyed previously expected a smaller drop, forecasting 52.7.

France performed significantly worse than expected, while Germany remained above 50 for the fourth consecutive month, supported by a better-than-expected performance from the manufacturing sector.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, "A key drag on growth was yet another decline in commercial activity in France's services sector," adding that this "may be related to strikes and unrest disrupting some local economies."

Even so, he added that overall economic activity in the eurozone in October was still “one of the best in the past three years.”

The eurozone economy has shown resilience against the Iran war and the resulting energy price shock; this shock, together with inflation above target, has prompted the European Central Bank to raise interest rates twice and hint at the possibility of further tightening.

However, the market also worries that continued conflict in the Middle East and the recent jump in bond yields will weigh on economic activity. There is a consensus expectation that officials will keep borrowing costs unchanged next week.

David Powell, Senior Economist for the eurozone, said: “The eurozone Composite PMI survey indicates that the region's economy is beginning to weaken under the heavy burden of higher commodity prices and tighter financial conditions. We believe that this double blow will almost certainly lead the European Central Bank to keep rates unchanged in October and end this round of rate hikes after one last increase in December.”

Some investors and economists even believe that the selloff in French bonds could escalate into another eurozone debt crisis; Franklin Templeton’s Head of Fixed Income warned on Wednesday that it could ultimately be more serious than the crisis over a decade ago.

Speaking about inflation, Williamson said input costs have risen sharply again, prompting companies to raise prices to protect margins.

Williamson said, “The ‘continued growth, stubbornly high inflation’ landscape shown by the October flash PMI may further fuel speculation of more aggressive policy tightening by the European Central Bank,” adding that higher borrowing costs are already beginning to restrain demand.

The PMI, released at the start of each month and known for pinpointing economic trends and turning points, is closely watched by the market. As an indicator measuring the breadth (not depth) of output change, business surveys sometimes struggle to be mapped directly to quarterly GDP.