The activity of companies in the euro zone contracts at the fastest pace in almost two years | Economy

Business activity in the euro zone continues to decline weighed down by inflation, rising energy costs and upward pressure on wages. It is contracting at the fastest rate in almost two years, according to the PMI indicator, the thermometer that most anticipates changes in the economic outlook. Demand is dampened by rising prices, and according to S&P Global chief economist Chris Williamson, “businesses are becoming increasingly concerned about high inventory levels and weaker-than-expected sales.” The manufacturing sector decreases for the fifth consecutive month and all those subsectors that depend especially on energy to produce, fall at an unrecorded rate —not counting the months of confinement— since July 2012.

Total activity in the euro zone, measured by the purchasing managers’ composite index, stood at 47.1 points, the lowest figure in the last 23 months —a figure above 50 points indicates growth and a lower figure indicates a decline in activity—, according to the PMI, published by S&P Global Market Intelligence to measure the behavior of the economic activity of private sector companies. Compared to September, the PMI fell one point, from 48.1 points. The PMI (Purchasing Managers’ Index) for the euro zone is compiled from a survey of purchasing managers of more than 5,000 companies belonging to the service sector and the manufacturing sector of the area of ​​the single currency countries. It is the index that first detects trend changes in the economic climate in the industrial sector.

Among the factors behind this slowdown —which the report qualifies as the sharpest since 2013, excluding the period of confinement— is the rise in energy costs, which hampers industrial production processes, and upward pressures from salary costs. The less bad note is given by the shortage of supplies, which, according to the document, is easing. All these variables keep business confidence at the lowest level of the last two years.

If the evolution by sectors is observed, the manufacturing industry is the one that stagnates the most, especially in the subsectors of the manufacture of chemical substances and plastics and of basic resources. The counterpoint is put by the technology, industrial services, pharmaceutical and biotechnology companies, which have indeed registered growth. Looking at the rating of the indicator, the European manufacturing PMI stood at 46.6 in October, compared to 48.4 in September. Taking the indicator referring to production within this sector, October leaves a figure of 44.2, compared to 46.3 the previous month.

Downturn in the services sector

In the commercial activity of the service sector there is no good news either. The indicator fell from 48.8 points in September to 48.2 in October, marking the minimum of the last 20 months. Despite this, the optimism of businessmen in the sector increased slightly, driven in part by the relief in the supply crisis. The shortages have been reduced, although this has not only been influenced by the improvement in the transport of goods, but also by the decline in demand, since the purchase of supplies stood, according to the report, at one of the lowest rates since the global financial crisis of 2008. Companies surveyed in October confirmed improved transport capacity and reduced component shortages. The generalized increase in the cost of living, which is reducing consumption, and the tightening of financial conditions, which make it difficult to access credit, are the main problems facing the sector, according to the document.

Major European economies are also suffering. Germany recorded the largest cut in the PMI data in the euro zone: it fell to 44.1 points, its lowest level since 2009 (not counting the stoppage of the pandemic). Both the manufacturing sector and the services sector underwent a negative evolution, weighed down by the energy crisis, which is of particular concern to its industrial sector. In the case of France, the PMI falls from 51.2 to 50 points, which indicates a lack of growth in its economy. The decline in its manufacturing sector was offset by a moderate expansion in the services sector, which prevented a decline in business activity.

The rate of job creation recovers slightly in Europe after slowing in September to its lowest level in 18 months. However, the report maintains that the recovery in employment is being affected by a cutback in personnel at some firms, which are lowering their production capacity to adapt to a context of low demand.

Finally, the forecasts for the remainder of the year are not positive either and the chief economist of S&P Global Market Intelligence maintains that: “It seems likely that the euro zone economy will contract in the fourth quarter given the panorama of a growing decrease in activity total and deterioration of the demand observed in October”.