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Eurozone business activity fell sharply in November, increasing the odds of a half-point interest rate cut by the European Central Bank next month.
Hamburg Commercial Bank’s composite Eurozone purchasing managers’ index unexpectedly fell to a 10-month low of 48.1 points, sinking below the 50-point mark that separates growth from contraction, according to a flash estimate published on Friday. Analysts had expected no change from last month’s reading of 50.
“In the medium term, the outlook appears bleak, especially with the potential impact of [US president-elect Donald] Trump’s tariff policy on European growth,” Christophe Boucher, chief investment officer of ABN AMRO Investment Solutions, wrote in a note to clients.
Investors reacted by pricing in a greater chance of a bigger rate cut at the ECB’s meeting on December 12, with the probability of a half-point reduction doubling to 60 per cent, according to levels implied in swaps markets.
The euro fell more than 1 per cent to $1.033 on Friday, dragged down by the weaker than expected business activity data, hitting its weakest level against the dollar since Europe’s energy supply crisis in late 2022. It then recovered slightly to $1.041.
While the decline of manufacturing in the currency bloc accelerated slightly in November, the larger services sector also plunged into negative territory, with activity in the sector falling to a 10-month low.
“The Eurozone’s manufacturing sector is sinking deeper into recession, and now the services sector is starting to struggle after two months of marginal growth,” said Cyrus de la Rubia, chief economist at HCOB, which publishes the index with S&P Global.
The PMI survey, which is seen as one of the most reliable early indicators of economic activity for the Eurozone, is closely watched by monetary policymakers. In recent months the ECB has become increasingly concerned about tepid growth and faster than expected falls in inflation.
The Eurozone economy expanded by just 0.4 per cent in the third quarter from the previous three-month period.
In October the ECB lowered borrowing costs by a quarter-percentage point for the second month in a row, taking rates to 3.25 per cent. So far, the market consensus had been that policymakers would continue to lower rates by a quarter-point at its next four meetings at least.
The poor November data represents a “palpable setback” for hopes of an imminent recovery in the Eurozone economy, Ralph Solveen, economist at Commerzbank, wrote in a note to clients, adding that stagnation was the likely scenario for the final quarter this year and the first quarter of 2025.
Germany’s economic performance in the third quarter was even worse than the country’s statistical office Destatis estimated last month. On Friday it halved its estimate for real GDP growth down to 0.1 per cent, following a 0.3 per cent decline in the second quarter. Foreign trade was a big drag on output, with exports falling 1.9 per cent quarter on quarter while imports rose 0.2 per cent.
The slide in exports continued in October, as exports to non-EU countries dropped 6.9 per cent, Destatis said in a different release.
“Germany is embroiled in a tortuously protracted phase of stagnation,” said Andreas Scheuerle, an economist of Frankfurt-based Deka Bank, adding that cyclical and structural issues had been hitting the EU’s largest economy “in a toxic way”.
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