Euro zone growth slows to 4-month low amid rising costs and French strife, survey shows

By Jonathan Cable

LONDON, Oct 23 (Reuters) - Growth across the euro zone's private sector slowed to its weakest pace in four months in October, hurt by an energy-driven rise in costs and a renewed contraction in France amid political and financial instability, a survey showed.

The S&P Global Flash Eurozone Composite PMI Output Index fell to 51.9 in October from September's 53.1, its lowest reading since June and lower than all forecasts in a Reuters poll which had predicted a modest dip to 52.7.  

A PMI reading above 50.0 indicates growth.

"Following a spring and summer where the euro zone economy defied expectations, the flash October PMIs pour a little bit of cold water on just how much further sentiment could improve," said Rory Fennessy at Oxford Economics.

"The volatile situation in France weighed heavily on the euro zone picture, with government borrowing costs spiking further as the fiscal situation worsens."

French business activity unexpectedly contracted this month, reflecting a sharp decline in demand for goods and services which businesses surveyed tied to heightened political uncertainty and economic pressures.

Government borrowing costs in France have jumped in recent weeks on investor concerns about the country's ability to repair its finances, while waves of street protests have raised the political temperature ahead of a presidential election in the spring.

Meanwhile in Germany, Europe's largest economy, private sector growth also softened.

Britain's PMI showed resilience with firms having their strongest month for activity since February.

But British consumers reined in shopping last month as higher fuel prices ate into household budgets, official data showed earlier on Friday, and GfK said consumer confidence suffered its sharpest month-on-month fall since early in the COVID-19 pandemic in October.

PRICE PRESSURES

Input costs in the currency union accelerated for the second consecutive month linked to higher energy, fuel and transport costs in part due to the Middle East war. Despite this, firms raised their selling prices at a slower pace than in September, suggesting some margin compression.

"While manufacturers are continuing to feel the squeeze of higher energy prices, there is still little evidence of second-round effects, which will be reassuring for the ECB," said Harry Chambers at Capital Economics.

The European Central Bank will hold its deposit rate at 2.50% next week but raise it by 25 basis points in December as inflation runs nearly double its 2% target, a Reuters poll found earlier this month.

Business confidence in the euro zone fell to a five-month low, the survey showed, with optimism dropping most sharply in manufacturing. 

France, beset by financial pressures and political turbulence, stood out for its pessimism. Its PMI pointed to economic contraction with business confidence hitting its lowest since 2012 outside the pandemic period.

NEW EXPORT ORDERS GROW, HIRING STAGNATES

New orders in the euro zone — a key gauge of demand — grew at their slowest rate in the current four-month expansion sequence, with both manufacturing and services posting only modest gains. New export orders rose for a third consecutive month, however, an encouraging sign after nearly 4-1/2 years of continuous monthly declines.

The preliminary services PMI fell to a two-month low while a manufacturing output index - which feeds into the composite reading - dropped to a four-month low.

Hiring in the single currency area came close to a standstill, the survey showed, with employment barely rising after slight gains in the prior two months. Services sector job creation eased to a five-month low and manufacturing payrolls edged down after two months of improvement.

(Reporting by Jonathan Cable; Editing by Toby Chopra)