Eurozone business activity fell sharply in November, with services joining manufacturing in contraction. The Composite PMI hit 48.1, signalling the steepest decline since January. The euro and bond yields weakened, while equities turned red, with banks witnessing sharp declines.
Business activity in the eurozone contracted unexpectedly in November, driven by a sharp deterioration in the services sector.
The Flash Eurozone Composite Purchasing Managers’ Index (PMI) dropped to 48.1 from the neutral 50.0 recorded in October. This marked the steepest contraction since January and fell short of market expectations for an unchanged reading.
Services falter as manufacturing remains in crisis
The services sector, a key driver of the eurozone economy, slipped into contraction for the first time in 10 months, with its PMI falling to 49.2 from 51.6 in October.
Manufacturing continued its prolonged slump, with the PMI declining further to 45.2, marking 20 consecutive months of declining production.
“The eurozone’s manufacturing sector is sinking deeper into recession, and now the services sector is starting to struggle after months of marginal growth,” said Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.
“It is no surprise really, given the political mess in the biggest eurozone economies lately,” de la Rubia added.
Firms across the region struggled with declining new orders, which fell for the sixth consecutive month and at their fastest pace this year.
Export orders also dropped sharply, exacerbating the pressure on businesses.
Weak confidence prompted some firms to scale back employment, with workforce numbers declining marginally.
New inflation headache for the ECB?
Despite the slowdown in business activity, inflationary pressures resurfaced. Input cost inflation rose to a three-month high, driven by a sharp increase in services input prices, although manufacturing costs fell.
Output prices also accelerated compared to October, posing a dilemma for the European Central Bank (ECB).
“The environment in November is stagflationary. On one hand, activity is declining across the board; on the other, input and output prices are rising more quickly,” de la Rubia observed.
“Service sector selling price inflation is a major headache for the ECB.”
De la Rubia suggested that some ECB policymakers may advocate for a rate pause in December. However, the majority is likely to favor a 25-basis-point rate cut.
Germany and France signal deeper troubles
Germany and France, the eurozone’s largest economies, recorded sharper contractions in November. France saw its services PMI plunge to 45.7 from 49.2 in October, marking its worst performance since January.
“The French economy is being rocked by uncertainties,” said Dr. Tariq Kamal Chaudhry, economist at Hamburg Commercial Bank.
He highlighted a particularly alarming outlook amid France’s ongoing domestic political crisis, which has weighed on both services and industrial sectors.
Similarly, Germany’s Services PMI entered contraction for the first time in 9 months, falling to 49.4 from 51.6 in October, defying market forecasts of 51.6.
In November, service providers’ activity took a hit for the first time since February. Companies are also grappling with rising costs, especially wages,” noted Dr. de la Rubia. He added, “The political uncertainty, which has increased since Donald Trump’s election as U.S. President and the announcement of snap elections in Germany on February 23, isn’t helping.”
Market reaction: Euro and bank stocks tumble
The unexpected contraction in eurozone business activity in November sent ripples across financial markets.
The euro dropped over 1% against the dollar to trade at $1.04, its lowest level since November 2022, as investors priced in expectations of accelerated ECB rate cuts.
Eurozone bond yields fell across the board. Germany’s 10-year Bund yield declined by eight basis points to 2.25%, while Italy’s BTP yield dropped five basis points to 3.50%, and France’s OAT yield fell seven basis points to 3.04%.
Equities also faltered, with the Euro STOXX 50 index losing 0.7%. Italy’s FTSE MIB fell 1%, France’s CAC 40 slipped 0.8%, and Germany’s DAX and Spain’s IBEX 35 both dropped 0.5%.
The banking sector bore the brunt of the losses, with shares of Intesa Sanpaolo, Unicredit, Societe Generale, BNP Paribas, Deutsche Bank, and Banco Santander shedding between 2.5% and 4%.
In contrast, utilities such as Iberdrola, RWE, and E.ON gained 1% to 2.5%, reflecting investor preference for defensive sectors.