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European activity unexpectedly slipped in November, according to flash PMI readings. Private sector activity flatlined in the UK, and contracted outright on the continent as political concerns, both domestic and stemming from the election of Donald Trump, weighed heavily on sentiment.
With this now spilling over to real activity, and to forward-looking expectations, the outlook for European growth looks grim ahead of the Christmas holidays. While we are inclined to see the initial market reaction as overblown at present, negative headwinds for European growth are undeniably building, loading downside pressure on both the euro, and on sterling.
Turning first to eurozone readings, the latest composite print landed at 48.1, down from 50.0 last month, and below market expectations that had expected to see an unchanged headline measure.
This weakness was reflected in a softening across both sectors and geographies. For the bloc as a whole, the manufacturing PMI fell to 45.2, down from 46.0 in October, while services dropped to 49.2 against 51.6 previously.
Moreover, as has been typical over recent months, France and Germany continued to underperform the eurozone more broadly. The former delivered a composite PMI of 44.8, the latter a 47.3 reading. In each of these instances, politics was flagged as a concern weighing on sentiment. In Germany, that stemmed from the recent collapse of the government, in France from budget negotiation challenges, with all this taking place against the backdrop of an incoming Trump administration and the associated risk of tariffs.
A similar story held for the UK too, where the recent budget has failed to inspire confidence amongst UK businesses, with data indicating a sharp drop in business optimism since October.
This left the composite PMI to print at 49.9, just a fraction below the 50 no-change mark, signalling a near as makes no difference flatlining in economic activity through November. Payroll costs in particular were flagged as a significant concern, motivated both by the hike in employer National Insurance contributions and by a rise in the minimum wage. Even so, that these are concerns for businesses, is likely good news for the BoE, implying that firms will not simply be able to pass on increased staff costs to consumers, which could otherwise have boosted inflation.
Taken as a whole, this latest set of readings offers a downbeat perspective on European growth prospects. For the eurozone, this largely continues a trend that has been in place for much of the year, for the UK, it marks a reversal of recent fortunes.
Worryingly for policymakers, this latest fall comes as seasonal adjustments should have turned positive when compared to October. As such, these latest readings have unsurprisingly weighed on the respective currencies, with GBPUSD and EURUSD making losses this morning. The former is testing the 1.25 resistance, a level last seen in early May, while the latter is trading below 1.04, having not plumbed such depths since late 2022.
Author:
Nick Rees, Senior FX Market Analyst