Eurozone business activity fell sharply in November, raising the likelihood of a half-percentage-point interest rate cut by the European Central Bank (ECB) in December.
The Eurozone Composite Purchasing Managers’ Index (PMI), a widely watched economic indicator, unexpectedly dropped to 48.1 points, a 10-month low, according to estimates released on Friday by Hamburger Handelsbank. This reading is below the critical 50-point threshold that separates growth from contraction. Analysts had anticipated no change from last month’s neutral reading of 50.
“In the medium term, the outlook is gloomy, particularly due to the potential impact of [US President-elect Donald] Trump’s tariff policy on European growth,” said Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions, in a note to clients quoted by the Financial Times (FT).
Rate cut already priced in
Investors reacted swiftly, with markets increasingly pricing in the possibility of a larger rate cut at the ECB’s 12 December meeting. The probability of a half-point cut nearly doubled to 55%, as implied by swap markets.
The weaker-than-expected business activity data also impacted the euro, which fell more than 1% to $1.033, marking its lowest level against the dollar since the energy supply crisis of late 2022.
Both the manufacturing sector and the services sector contracted in November, with the latter posting its lowest activity levels in 10 months.
“The eurozone manufacturing sector is sinking deeper into recession, and now the services sector is starting to struggle after two months of marginal growth,” said Cyrus de la Rubia, chief economist at HCOB, which publishes the index with S&P Global.
Recession likely to extend into early 2025
The PMI survey, regarded as one of the most reliable leading indicators of economic activity in the euro area, is closely monitored by monetary policymakers. Recent months have seen growing concerns within the ECB about sluggish growth and a faster-than-expected decline in inflation.
In the third quarter of 2024, the euro area’s economy grew by just 0.4% quarter-on-quarter. The ECB responded in October with its second consecutive quarter-point rate cut, bringing interest rates down to 3.25%.
So far, markets have broadly expected policymakers to implement additional quarter-point rate cuts over the next four meetings. However, November’s poor data has heightened fears of a recession, particularly for the last quarter of 2024 and the first quarter of 2025.
Commerzbank economist Ralph Solveen described the latest PMI figures as a “palpable setback” for hopes of a near-term recovery, adding that a recession now seems inevitable.
German exports continue to decline
Germany, the eurozone’s largest economy, has faced even worse-than-expected economic challenges. On Friday, Destatis, the German federal statistical office, halved its forecast for real GDP growth in the third quarter to 0.1%, following a 0.3% contraction in the second quarter.
Weak foreign trade played a significant role, with exports declining by 1.9% quarter-on-quarter, while imports rose marginally by 0.2%. The trend persisted in October, with exports to non-EU countries plummeting by 6.9%, according to a separate statement from Destatis.
“Germany has entered a protracted recessionary phase in a roundabout way,” said Andreas Scheuerle, an economist at Deka Bank in Frankfurt. He noted that a combination of cyclical and structural problems is weighing heavily on the EU’s largest economy, describing the situation as “poisonous.”
