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German turnaround helps euro zone business activity hit year-to-date high

Economic activity in the euro zone reached a high for 2016 in October, according to fresh figures released on Monday.

An initial estimate by IHS-Markit for its euro zone purchasing managers' index rose to 53.7 from 52.6 in September, representing the highest monthly increase since 2016 began. The index measures both the services sector and manufacturing.

"The euro zone economy showed renewed signs of life at the start of the fourth quarter, enjoying its strongest expansion so far this year with the promise of more to come," Chris Williamson, chief business economist at IHS Markit, said in a statement.

After the release, the euro continued hovering close to a seven month low, trading at $1.0890 at 9.20 a.m. London time. It fell to its lowest level against the dollar since last March on Friday to $1.0859.

German rebound

JEAN-FRANCOIS MONIER | AFP | Getty Images

The German economy showed signs of rebound on Monday, with a significant increase in the private sector. The flash German PMI composite output index stood at 55.1 in October, representing a three-month high.

"The German economy has entered the fast lane again at the start of the fourth quarter, with output growth accelerating from September's recent low," Oliver Kolodseike, an economist at IHS-Markit said in a statement.

In September, the country's PMI stood at 52.8 – a 16-month low. According to Kolodseike, "the improvement in the PMI in October lifts hopes that the weaker expansions we have seen in the past two months were just a temporary soft patch, rather than the beginning of a serious slowdown."

France left behind?

Earlier on Monday, data showed the French purchasing managers' index reaching the lowest figure in two months, falling to 52.2 in October, compared to 52.7 in September.

Growth in the euro zone still remains fragile and unbalanced despite assistance by the region's central bank. President Mario Draghi of the ECB (European Central Bank) said during a press conference last week that the central bank wasn't considering ways to taper its quantitative easing program. However, he added that that an abrupt end would be unlikely.

The ECB's quantitative easing program is currently scheduled to end in March 2017 but market watchers anticipate an extension to be announced before the end of the year.

Concerns over sharp divergences

The divergence between the French and the German figures renewed concerns that the performance of the euro area is highly dependent on Germany.

"The limited country data for Germany and France showed a sharp divergence between the PMIs for the euro zone's largest two member states," Stephen Brown, European economist at Capital Economics, said in a note.

"While the pick-up in the overall euro zone PMI will be welcomed by policymakers, the fact that it was driven by a sharp rise in Germany clearly highlights the divergence in growth between the euro-zone's two largest member states," Brown added, forecasting a QE extension next December.

IHS Markit is forecasting a 0.4 percent quarter-on-quarter increase in euro zone GDP (gross domestic product) in the last quarter of the year.

Despite Monday's figures, IHS Markit is concerned over euro zone growth prospects next year. "We suspect euro zone GDP growth could ease back to 1.4 percent in 2017 as it is likely to be increasingly hampered by political uncertainties," Howard Archer, chief European economist at Markit said in a note, pointing to elections in France and Germany and uncertainty over the Italian and Spanish governments.

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