Europe Economy

Euro Zone Manufacturing Slows, Services Bounce Back


Euro zone services growth bounced back much more than expected this month after hitting a two-year low in September, but the manufacturing expansion waned further, a key survey showed on Wednesday.

Growth in the euro zone's dominant services sector took back some of the heavy hit it received last month as credit market turmoil that began in August started to ease.

The RBS/NTC Flash Eurozone Services Purchasing Managers Index rose to 55.6 in October from 54.2. This beat all but one forecast in a Reuters poll of 43 analysts and the consensus of 54.5, driven by a pickup in new business.

The manufacturing sector, however, showed no sign of a turnaround. The RBS/NTC Flash Eurozone Manufacturing Purchasing Managers index fell to 51.5 in October from 53.2 in September to reach its lowest since August 2005 and well below the 53.0 forecast by economists.

Both remain above the 50.0 mark that divides growth from contraction.

The manufacturing numbers reflected a global cooling in growth, but were also tempered by a rising euro and higher oil prices which have both soared to record highs in recent weeks.

ECB's Tightening Peaked

The survey will support analyst views that the European Central Bank has already reached a peak in its interest rate hiking cycle at 4.0 percent.

"The rebound we have had in October in services is probably related to some normalisation in the financial sector," said Jacques Cailloux, chief euro area economist at RBS, which sponsors the data.

"But this is not a turn in the trend ... We will probably move sideways next month or decline," he added.

The manufacturing sector hit the overall composite index, which eased slightly to 54.5 from 54.7 the previous month, its lowest since September 2005.

Incoming new business in the services sector picked up to 55.3 in October from 54.2 in September. Employment in the sector also looked robust at 55.2 in October, a tad higher than the 55.0 seen in September.

Prospects for new business also stabilised as the business expectations index held at 60.9, only marginally down from 61.1 in September.

Losing Momentum

Manufacturing suffered more, with the factory output index falling to 52.5 in October, down from 55.5 in September and marking the weakest rate for production since August 2005.

New orders in the sector fell to 50.6 this month, its lowest since May 2005, from 52.2 in September.

"The manufacturing sector is losing momentum and quite sharply and could see industrial production contracting later this year," said Cailloux.

He estimated eurozone industrial production would cool from around 4.0 percent to 1.0 percent by the turn of the year. This in turn is having an impact on hiring, he said.

Employment slipped to 51.1 in October from 52.5 in September.

While a higher euro was one factor behind a downtrend in manufacturing, it was not the dominant cause of a slowdown that began some months ago, Cailloux said.

"There is a moderation in demand, from the U.S. as well, rather than this being a pure FX story."

Inflationary pressures also diverged last month across both sectors. While input prices rose to 60.2 in the services sector from 59.1 the previous month, the prices charged index dipped to 52.0, its lowest since November last year, from 53.4.

This suggested firms found it harder to pass on costs despite a pick-up in energy costs.

But in the manufacturing sector costs eased. The input prices index slipped to 58.9 in October, its lowest level since August 2005, from 59.6.

The survey said the strength of the euro helped to partly offset the rise in the cost of oil sourced from dollar-denominated markets.

Data for the Flash PMIs were collected between Oct. 12-23.