EU Economy
Eurozone services activity contracted in October at fastest rate since mid-2009; France, Italy and Spain deteriorated
By Finfacts Team
Nov 4, 2011 - 9:29 AM

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Source: Markit

Eurozone services activity contracted in October at the fastest rate since mid-2009 as conditions in France, Italy and Spain deteriorated.

Business activity and new order inflows in the Eurozone service sector both contracted in October at the fastest rates since July 2009. Business confidence also continued to decline, hitting a two-and-a-half year low, while jobs growth stagnated.

At 46.4 in October, down from 48.8 in September, the final Markit Eurozone Services Business Activity Index signalled a contraction in output for the second month running, and came in below the earlier flash estimate of 47.2. Highlighting the ongoing weakness of demand, new business to Eurozone service providers also fell for the second successive month, and to a greater extent than signalled by the earlier flash estimate.

Germany and Ireland see modest activity growth, while France falls abruptly back into contraction: Germany and Ireland both saw expansions in business activity, but in both cases the rates of growth were only modest. Conditions weakened elsewhere, with France, Italy and Spain all reporting marked reductions in service sector activity.

Spain and Italy saw the steepest rates of reduction in October. France suffered a marked reversal of fortunes, with business activity contracting for the first time since August 2009 and at the fastest pace for over two-and-a-half years. Moreover, the month-on-month declines in both the French activity and new business indices were the steepest in the survey history.

Lower levels of new business were reported by all nations in October. Rates of decline eased in Germany, Italy and Ireland, but Spain saw new business fall at the most marked pace since May 2009.

Jobs growth stagnates as outlook darkens: Service sector employment was unchanged in October, the first time in one-and-a-half years that payroll numbers have failed to rise. Spare capacity remained available, as highlighted by backlogs of work dropping at the quickest pace since September 2009.

Jobs growth slowed to a 15-month low in Germany, while France reported a slight increase following cuts in September. Employment outside of the big-two nations fell at the steepest pace in a year.

Service providers’ reluctance to add to payroll numbers partly reflected the worsening outlook for the sector. Confidence about activity levels during the coming year weakened for the third straight month, reaching its lowest level for over two-and-a-half years. Companies reported insecurity in the current economic environment given the ongoing banking and European debt crisis.

Markit says German service providers are becoming increasingly pessimistic in their outlook. Confidence dropped to its lowest level since March 2009 with German companies, on balance, expecting activity to fall over the next twelve months. Optimism dropped to its weakest for around two-and-a-half years in both France and Spain, but rose sharply among service providers in Italy and Ireland.

Input cost inflation eases in Germany, France, Italy and Ireland: October saw service sector input costs rise at the weakest pace in a year. Inflation was also slightly less marked than the earlier flash estimate. Rates of increase eased in all nations except Spain, with the steepest overall inflation seen in Italy and Germany.

Reduced new business inflows, weaker business optimism and strong competition all contributed to further price discounting at service providers. Output charges fell for the second successive month in October.

By country, reductions were centred on Spain, Ireland and Italy, with the latter two reporting sharper reductions than in the previous month. Charges were unchanged from September in France, whereas Germany increased output prices following a marginal decrease in the previous month.

Rob Dobson, senior economist at Markit said:
“The final services PMI not only confirmed that business activity and new orders fell at the fastest pace since mid-2009, but also indicated that the contractions were sharper than originally estimated. It is striking to see that no countries reported an increase in new business in October.

“France was particularly hard hit in October, with its business activity and new order indices suffering the sharpest month-on-month declines in the survey history. Italy and Spain are also still mired in deep contractions. Brighter spots were Ireland, which held on in positive territory, and a return to growth in Germany. But rates of expansion in both are still nowhere near highs achieved earlier in the year.

“The ongoing debt crisis and deteriorating global economic backdrop are undoubtedly subduing business confidence and the labour market. Optimism has now fallen to its lowest level since March 2009 and jobs growth has stagnated. Pessimism is growing at German services providers in particular, with a rising expectation there that activity will be noticeably lower in one year’s time.”

The Eurozone Services PMI (Purchasing Managers' Index) is produced by Markit and is based on original survey data collected from a representative panel of around 2,000 private service sector firms. National data are included for Germany, France, Italy, Spain and the Republic of Ireland. These countries together account for an estimated 80% of Eurozone private sector services output.

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