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Eurozone private sector output rose at its fastest pace since December 2007 with the manufacturing sector expanding for the first time in seventeen months and services sector maintaining growth. A separate report showed that industrial order growth topped economists' expectations.
The flash Eurozone composite output index, a weighted average of the manufacturing output index and the services business activity index, rose to 53 in October from 51.1 in September, data released by the Markit Economics showed Friday. The index registered an increase for the third successive month and the strongest monthly gain since December 2007. Economists had expected a reading of 51.6. A reading above 50 indicates expansion in the sector.
The manufacturing purchasing managers' index or PMI showed a flash reading of 50.7, up from 49.3 in September, the first increase in seventeen months. Economists had forecast a reading of 50. Manufacturing output increased for the third month running, with the rate of growth accelerating to the fastest since November 2007.
Meanwhile, service sector activity rose for the second month, expanding at the sharpest rate since February of last year. The flash services PMI grew to 52.3 from September's 50.9.
"Another increase in the preliminary PMI data refutes all pessimists and shows that the economy should have continued growing at the start of the fourth quarter," Carsten Brzeski, Senior Economist at ING said. "Today's numbers confirm that the good vibes could keep on going for a while." However, the economist warned that downside risks remain. The strong euro exchange rate has joined a worsening labor market and credit crunch issues as the most prominent impediments to a Eurozone recovery.
New orders to Eurozone private sector rose for the second month running, driven primarily by manufacturing, where new orders showed the strongest gain since August 2007. Despite the recent strength of the euro, new export orders showed the largest rise since January 2008, but the rate of growth remained very subdued. Higher levels of new business were reported for the second month running in services, with growth hitting a twenty-month high.
Employment fell for the sixteenth successive month, but the rate of job losses eased compared to September. Both manufacturing and services saw reduced rates of job losses, though the former continued to see the sharper rate of job shedding. Backlogs of work fell for the nineteenth month, indicating that spare capacity persists and headcounts are likely to fall further in the near future.
Confidence in the service sector about the year ahead remained buoyant. Meanwhile, the ratio of manufacturing new orders to finished goods inventories hit a near ten-year high. Manufacturers input prices rose for the first time in a year due to delivery delays and rising commodity prices, while service sector input costs fell marginally.
Markit Chief Economist Chris Williamson said, "The flash PMIs indicate that the Eurozone economy has entered Q4 on a strong note, with growth accelerating in both manufacturing and services."
"Eurozone recovery is gaining momentum," BNP Paribas economist Clemente De Lucia said. In the second quarter, euro area gross domestic product or GDP fell 0.2% sequentially. The Eurozone economy probably exited the worst recession in the third quarter. According to an interim forecast by the European Commission, Eurozone would grow 0.2% in the third quarter and by 0.1% in the fourth quarter.
Separate reports from Markit Economics showed that the seasonally adjusted flash composite output indicator for Germany rose to 52.6 in October from 52.4 in September. The index has now registered above the 50 no-change mark for three consecutive months. Manufacturing PMI rose to a sixteen-month high of 51.1, while the services PMI fell to a three month low of 50.9 from September's 52.1.
The Markit/CDAF flash composite output index climbed to 58.4 in October from 54.8 in September, the headline index indicated that growth accelerated markedly to reach its steepest in nearly three years. The manufacturing PMI climbed to a thirty five-month high of 55.3 and service sector PMI rose to 57.8, highest in twenty months.
Also on Friday, data released by the Eurostat showed that the euro area industrial orders grew 2% month-on-month in August, quicker than the 1.2% growth predicted. However, it was lower than the revised growth of 3% recorded in July. Annually, new orders decreased 23.1% in August, compared to the revised fall of 24.9% in the previous month.
Brzeski said today's numbers could lead to new speculation about an earlier-than-expected exit for the European Central Bank. However, despite all enthusiasm about the recent numbers, it is still too early to give the all-clear for the Eurozone. Especially with the strong euro, the ECB should sit very comfortable in its current wait-and-see position, the economist said.
Earlier this month, the ECB kept its key interest rate unchanged at a record low of 1% for the fifth month in a row to nurture the 16-nation economy, which is showing signs of recovery.
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