Eurozone October final manufacturing PMI at 50; Germany and France continue to contract, weak new orders hamper recovery process

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The Eurozone's manufacturing sector stagnated in October, with the PMI landing right on the threshold between expansion and contraction. Although output expanded slightly for the eighth straight month, flat new orders, ongoing shrinking exports, and accelerated layoffs together reveal the fragility of the industry’s recovery.

On Monday, final data compiled by S&P Global showed that the Eurozone's final manufacturing PMI for October was 50.0, matching the preliminary estimate and slightly above September’s 49.8. The final manufacturing PMI readings for Germany and France, the two largest economies, were 49.6 and 48.8 respectively, both remaining in contraction territory and unable to escape difficulties.

The data shows that, after more than three years of nearly continuous contraction, new orders in the Eurozone finally stabilized, but failed to grow. Export orders—a key component of overall European goods demand—fell for the fourth consecutive month in October. In response, companies are accelerating the reduction of their workforce, with the contraction in the manufacturing job market lasting nearly two and a half years, putting pressure on expectations for the region's economic resilience.

This series of data gives the European Central Bank more reasons to remain patient with its policy. As inflationary pressure continues to ease, the ECB kept interest rates unchanged for the third consecutive meeting last week and gave no hint about future policy direction. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, commented:

“For the Eurozone’s manufacturing sector, at best, we can say that the green shoots of recovery are very fragile.”

New orders stagnate, external demand remains weak

Weak demand remains the core obstacle dragging down the Eurozone’s manufacturing recovery. October data shows new orders, after shrinking for more than three years, finally leveled off, neither increasing nor decreasing. Of particular concern is the continued weakness in external demand. As an important component of demand for European goods, export orders fell for the fourth consecutive month in October, clearly dragging down overall order volume.

Faced with weak demand, Eurozone manufacturers are seeking balance by reducing labor costs. Data shows that in October, companies accelerated the pace of layoffs slightly, extending the manufacturing sector’s employment contraction cycle to nearly two and a half years.

Notably, the acceleration of layoffs is happening as supplier delivery times lengthened to their highest level in three years—usually a sign of supply chain bottlenecks, but this still did not stop companies from cutting staff. On this, Cyrus de la Rubia commented:

“Layoffs are continuing and even accelerating. This is the result of weak demand, which forces companies to cut costs or increase productivity.”

On the positive side, inflationary pressure in the Eurozone continued to ease in October. Input costs for manufacturers were flat compared with September, while factory gate prices saw a mild increase for the first time since April. This trend strengthens the ECB's “wait-and-see” stance in rate decisions.

Nevertheless, businesses are not optimistic about the outlook. Due to ongoing concerns about weak demand and economic uncertainty, the index measuring business confidence for output in the next year fell for the second straight month and has dropped below the long-term average. Meanwhile, manufacturers continued to reduce their inventories of raw materials and finished products in October, continuing a prolonged destocking process that reflects a lack of confidence in a near-term recovery in demand.

German and French manufacturing continue to contract

There is a clear divergence in economic performance within the Eurozone. Greece and Spain’s manufacturing sectors performed the strongest, with PMI readings reaching 53.5 and 52.1 respectively—both in healthy expansion territory.

However, the performance of Germany and France—the “twin engines” of the Eurozone economy—is concerning. Germany’s PMI rose slightly from September’s 49.5 to 49.6 in October, marking a second consecutive month of recovery, but still below the 50-point expansion threshold. Although manufacturing output grew for the eighth straight month, the pace of growth slowed to a three-month low. New order inflows marked only slight growth at the start of the fourth quarter, reversing September’s decline—the first in four months. Meanwhile, backlogs of orders have been declining steadily since mid-2022; although the pace of decline moderated in October, this further indicates that capacity pressures for manufacturers remain insufficient.

France’s PMI registered at 48.8 in October. The core issue is the continued weakness in demand, especially the drag from the domestic market. Companies interviewed blamed the decline in orders on uncertainty over the domestic political situation and the resulting hesitancy in customer spending. Even more alarming, manufacturers’ output expectations for the next 12 months turned negative for the first time in nearly ten months.

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