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Eurozone - Downturn gathers momentum in October

25 October 2011

At 47.2, down from 49.1 in September 2011, the 'Flash Eurozone PMI Composite Output Index' published by research firm Markit, fell further below the 50.0 no change level in October. The deterioration signalled a second successive monthly contraction of the private sector economy and the fastest rate of decline since July 2009.

Manufacturing output fell for the third month running and services activity fell for the second month, both seeing rates of decline accelerate to the fastest since mid-2009.

Falling output and activity reflected weaker demand for goods and services. New orders fell for the third consecutive month, showing the largest decline since June 2009. Manufacturers reported a drop in new orders for the fifth straight month, with the rate of decline gathering momentum to the fastest since May 2009. New export orders fell for the fourth month in a row, seeing the steepest decline since June 2009.

Service providers saw a weaker rate of loss of new business than manufacturers but, nonetheless, the fall was the second in a row and the fastest since July 2009.

Lower levels of new business contributed to a further fall in service providers' confidence about the year ahead, with expectations of growth dropping to the lowest since March 2009.

Germany saw another very modest expansion of output, though this represents a marked contrast to the strong growth seen in the first half of the year. Furthermore, German manufacturers reported the first drop in production (albeit only modest) since June 2009.

Output across both manufacturing and services fell in France for the first time since July 2009. Meanwhile, the rest of the Eurozone contracted for the fifth successive month, with the rate of decline of output accelerating to the fastest since June 2009.

Backlogs of outstanding business fell at the fastest rate since August 2009, down for the fourth successive month. Steeper rates of decline were reported in both manufacturing and services.

The reduced pipeline of orders meant employment growth slowed to near-stagnation, registering the weakest increase since the labour market recovery began in May of last year. Only marginal rates of job creation were seen in both manufacturing and services.

By country, Germany saw modest employment growth, but the rise was nevertheless the weakest since August of last year. Only very modest job
creation was meanwhile seen in France while, elsewhere across the region, jobs fell at the steepest rate since February 2010.

Average prices charged for goods and services fell for the second month running, with the rate of decline accelerating marginally to show the largest
(though still only moderate) fall since March 2010.

Lower prices for services were offset slightly by a rise in manufacturers' prices, though the latter was the smallest since producer prices began rising in
April of last year, and in marked contrast to the record rate of increase seen at the start of the year. Input costs rose at the slowest rate since December 2009. Costs continued to rise in services, though at a reduced rate, while manufacturers reported the first fall in their purchasing costs since September 2009, highlighting a rapid turnaround in raw material inflation since the record peak seen in February.

Chris Williamson, Chief Economist at Markit, commented "the PMI signals a heightened risk of the Eurozone sliding back into recession. The economy started the fourth quarter with the rate of contraction accelerating to the fastest since July 2009."

"Forward-looking indicators, such as the further lowering of expectations of services growth in the year ahead and the near-stalling of job creation,
suggest that companies are bracing themselves for the situation to continue to deteriorate."

"Furthermore, it is not only the periphery that is contracting. France saw a fall in private sector output for the first time in over two years, led by a worryingly steep deterioration in the service sector. Meanwhile, German manufacturing, the spearhead of the region's recovery, is now also in decline."

"The single bright spot seems to be the steep easing in price pressures that has accompanied the downturn, especially in manufacturing, where input prices fell for the first time in over two years."

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