Euro zone business growth remains weak in October

Euro zone business growth picked up less than expected in October despite much deeper price cutting, according to business surveys on Wednesday that gave scant reason to be optimistic about the months ahead.

Firms have now been reducing prices for over 2.5 years and did so last month at the steepest rate since early 2010, just when the single currency bloc was sinking into the depths of a financial crisis.

Weak growth and further discounting will add to pressure on the European Central Bank as it battles to ward off deflation and bring inflation - at a meagre 0.4 per cent in October - out of what it terms the "danger zone" and back to target.

Markit’s final Composite Purchasing Managers’ Index, based on surveys of thousands of companies across the region and seen as a good indicator of growth, only nudged up from September’s 10-month low of 52.0, coming in at 52.1.

Although it marked the 16th month that the index has been above the 50 line that separates growth from contraction, the expansion came at a cost.

A sub-index for output prices slumped to 47.1 from September’s 48.5, its lowest reading since February 2010.

"The combined threat of economic stagnation and growing deflationary risks will add to pressure on the ECB to do more to stimulate demand in the euro area, strengthening calls for full-scale quantitative easing," said Chris Williamson, chief economist at Markit.

Full-scale QE is one of the last policy options the ECB has left, and while it is not expected to change policy on Thursday, there is now an even chance it will buy sovereign bonds, a Reuters poll found this week.

The news was no better for the euro zone’s dominant service industry where the PMI dipped to a seven-month low of 52.3 from 52.4 and there was little chance of much improvement this month.

New business came in at the weakest rate for nearly a year, backlogs were run down again and firms reduced their workforce for the first time since March. That pushed the business expectations index down to an 16-month low of 57.2 from 59.3.

France’s PMI sank further below 50 and Italy’s suggested economic stagnation. The composite index for Germany, Europe’s largest economy, showed the pace of growth had eased from last month.

“The euro zone PMI makes for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life,” Mr Williamson said.

Reuters