The latest Purchasing Managers’ Index® (PMI®) survey data showed that the eurozone economy returned to contraction in November 2024, after stabilising in October. Business activity levels fell at the fastest pace since January, with services output falling markedly. Demand conditions remained weak across the region, with new orders in the private sector falling for the sixth consecutive month, marking the fastest decline since the start of the year. Demand from non-domestic customers was particularly weak.
Employment fell further, and business confidence fell to a 12-month low. At the same time, both input cost and output price inflation rates rose to their highest levels in the past three months.
The seasonally adjusted HCOB composite output PMI, which averages the two indicators of activity in the manufacturing and services sectors, fell to 48.3 in November, indicating a further slowdown in economic activity. This was the fastest decline in ten months.
The services sector was the hardest hit by the decline in activity, recording its first decline in output since the start of the year. The contraction in manufacturing also continued, with output volumes falling for the twentieth month in a row.
At the country level, the major eurozone economies (Germany, France, Italy) recorded contraction in business activity in November. While some other countries such as Ireland and Spain recorded expansions, with Ireland recording the strongest growth in output in two and a half years.
The data showed that the ongoing decline in demand for goods and services had a significant impact on economic activity in the region. New orders fell across all sectors, with the decline in orders from international markets accelerating. As a result of this decline in demand, the volume of work pending was reduced for the twentieth month in a row.
Market reaction to the Eurozone Services PMI Final
Market reaction to the Eurozone Services PMI Final reading was mixed. Investors have been closely watching economic indicators to gauge the direction of monetary policy by the European Central Bank. With inflation continuing to be a pressing concern across the eurozone, the ECB has been under pressure to strike a balance between controlling inflation and supporting economic growth. A flat PMI reading could reinforce the ECB’s cautious approach, as it suggests that the economy is not yet ready for a shift in interest rates. This slump could therefore lead to a prolonged period of low interest rates, which could have both positive and negative effects on various asset classes, including stocks and bonds.
The effects of a recession in the services sector extend beyond the immediate market reaction. A PMI below 50 could signal potential layoffs and hiring cuts, as companies may be reluctant to expand in an uncertain economic environment. This could slow consumer spending, exacerbating the challenges facing the services sector. Given that consumer spending is the main driver of economic growth in the eurozone, any decline in this area could have serious consequences for the overall economy. Consumer sentiment is closely watched by market analysts as it will play a crucial role in determining the economic outlook for the coming months.
Going forward, market participants will be closely monitoring consumer sentiment and potential government support measures as they navigate the uncertain economic landscape. The coming months will be crucial in determining whether the services sector is able to find a path to recovery or will continue to stagnate.
Eurozone Final Services PMI Forecast
Looking ahead, the outlook for the current month remains cautious. Analysts expect the services PMI to remain at or around the same level, reflecting ongoing challenges in the sector. Factors such as rising energy costs, supply chain disruptions and inflationary pressures are weighing on companies, making it difficult for them to achieve meaningful growth. In addition, geopolitical tensions and uncertainty surrounding the global economic landscape could dampen the outlook for the services sector. As a result, companies are likely to remain conservative in their investment and hiring decisions, potentially prolonging the current downturn.
Investors are also closely watching potential stimulus measures from the European Union as policymakers look for ways to support the economy. The focus on green recovery initiatives and digital transformation could provide some relief to the services sector, particularly in areas such as technology and sustainability. However, the immediate outlook remains uncertain, and many companies may choose to adopt a wait-and-see approach before committing to major spending. This cautious stance is likely to keep the PMI at 49.2 as businesses navigate a complex economic environment.
The Eurozone final services PMI reading of 49.2 reflects a slump in the eurozone services sector, with implications for markets and the broader economy. The unchanged figure suggests that while there is no further deterioration, the sector is not ready to recover either. Investors are likely to interpret this data through the lens of monetary policy and economic growth expectations.
As the European Central Bank grapples with inflation and growth challenges, a slump in the services sector could lead to a prolonged period of low interest rates, weighing on various asset classes.
