Eurozone growth waning at end of Q3; UK at 30-month low
The Eurozone economy continued to make steady progress in September, as solid gains in output and new orders supported further job creation. However, the rate of growth eased to a four-month low. The rate of UK economic growth slowed to a 30-month low in September, according to PMI (purchasing managers' index) survey data
The final Markit Eurozone PMI (purchasing managers' index) Composite Output Index posted 53.6, down from 54.3 in August and below the earlier flash estimate of 53.9. Following the dip in September, the average rate of expansion over the third quarter failed to accelerate and instead equalled the second quarter’s four-year high.
September saw solid, albeit slower, increases in output at manufacturers and service providers alike, with the rate of growth in the service sector slightly outpacing that achieved by manufacturing. Economic activity expanded across the ‘big-four’ nations and Ireland.
Ireland registered by far the steepest rate of increase, albeit the weakest signalled for 16 months. Growth also decelerated in Germany, Spain and Italy, but nonetheless remained relatively solid in each of these nations. There was also better news coming out of France, with growth accelerating to a three-month high in September.
The Output Index was also revised up by 0.5 points since the flash reading. Employment rose for the eleventh successive month in September, despite the rate of jobs growth easing to its weakest since January. Staffing levels were raised in Germany, Spain and Ireland, with Germany the only nation to see an accelerated increase. Employment fell in France and Italy.
Further growth of output and employment is also being signalled for the start of the fourth quarter, as new business continued to rise at a solid pace and backlogs of work rose at the quickest rate since May 2011. New orders rose in all of the nations covered, whereas outstanding business increased in Germany, France, Spain and Ireland, but fell in Italy. Average input costs rose only marginally in September, with the rate of inflation having slowed sharply since hitting a three-year high in May.
The latest easing mainly reflected the steepest drop in manufacturing input costs since January, driven by lower prices for commodities and oil in particular. Service sector cost inflation crept higher. Average selling prices in the Eurozone, meanwhile, were unchanged from August.
Services: The Eurozone Services Business Activity Index posted 53.7 in September, a seven-month low and below the earlier flash estimate of 54.0. The headline index has signalled expansion in each of the past 26 months, with the latest rate of growth above the average for that sequence.
The increase in business activity was underpinned by growth in new orders, with the pace of expansion in new work accelerating slightly since August. With backlogs of work also rising at the second-fastest rate in over four years and business optimism† still positive, the expansion in services output is likely to continue in coming months. Concurrent growth of business activity and new orders was recorded in each of the five nations covered by the survey in September.
The steepest expansion of output was registered in Ireland, with Spain in second place following a sharp growth slowdown (nine-month low). Growth also eased in Germany and Italy (both to two-month lows), but ticked higher in France. The broad-based expansion of business activity across the Eurozone service sector encouraged further job creation during September. Employment rose for the eleventh consecutive month, with increases seen in Germany, Spain and Ireland. The rate of jobs growth improved to the fastest since December 2011 in Germany, but slowed in each of the latter two nations.
Cuts were recorded in France and Italy. Average service sector charges in the euro area rose marginally in September, ending an unbroken sequence of decline that started in late-2011. The trend at the Eurozone level was mainly driven by Germany, where output prices were raised to the greatest extent for almost three-and-a-half years. Ireland also reported a strong increase, in contrast to reductions in France, Italy and Spain.
Cost pressures stayed relatively subdued in September. Input price inflation accelerated only marginally from August’s six-month low and remained well below the long-run average. Cost increases were signalled in all five of the nations covered by the survey.
Chris Williamson, chief economist at Markit said: "The final PMI reading came in slightly below the earlier flash estimate but still leaves a signal of the Eurozone economy having expanded 0.4% in the third quarter. “However, the failure of the economy to pick up speed over the summer will be a disappointment to the ECB, especially with job creation sliding to an eight-month low.
“The weakening of the pace of expansion in September raises the risk of growth fading further in the fourth quarter, which would in turn boost the likelihood of the ECB opening the QE taps further. An upward revision to the French PMI means the region’s second-largest economy could achieve growth of 0.2% in the third quarter, trailing the 0.4% and 0.3% expansions signalled for Germany and Italy respectively but providing welcome news of a return to growth. Spain looks to have enjoyed another strong expansion in the third quarter, with GDP set to rise by at least 0.8%, but there was a worrying drop-off in the pace of growth in September, leaving Ireland as the star performer.”
† for business optimism, companies are asked whether they expect levels of business activity in one year’s time to be higher, the same or lower than the current month.
The rate of UK economic growth slowed to a two-and-a-half year low in September, according to PMI survey data, suggesting that the economy sank further into a soft patch at the end of the third quarter.
The survey data suggest that GDP growth slowed to 0.5% in the third quarter, but that the economy is entering the fourth quarter at a pace down to just 0.3%.
At the moment, sustained strong hiring in services and construction suggests that companies are generally expecting weakness to be short-lived, but this could soon change unless demand shows signs of reviving.
The all-sector Markit/CIPS PMI fell from 55.4 in August to 53.9, its lowest since April 2013, to signal an easing in the pace of growth for a third straight month.
The September reading rounds of the worst spell of growth since the second quarter of 2013, with the surveys indicative of GDP growth waning from 0.7% in the second quarter to 0.5% in the third quarter. However, growth clearly eased during the quarter, with the survey data indicating that the quarterly rate of growth eased to a mere 0.3% in September compared to 0.7% in July.
Slowdown in UK spreads beyond manufacturing
Persistent weakness of the manufacturing sector has increasingly spread to the far larger services economy in recent months, hitting transport and other industrial-related services in particular. However, there are also signs that consumers have become more cautious and are pulling back on their leisure spending, such as restaurants and hotels. Wider business service sector confidence has meanwhile also been knocked by global economic worries and financial market jitters.
The service sector consequently reported the slowest growth of both business activity and inflows of new business for 29 months in September. Business confidence in the service sector also dropped to the lowest for just over a year. Manufacturers have also suffered a marked deterioration in growth of demand from consumers in particular in recent months, joining sluggish demand for investment goods such as plant and machinery amid still-weak capital expenditures by businesses.
Slower growth of manufacturing and services has left construction as the fastest-growing part of the economy, although even here inflows of new business grew at the second-slowest rate since mid-2013.