Interest rate cut expectations rise! Eurozone's November PMI enters contraction territory, with France's business activity shrinking at the fastest pace since January this year, and Germany's service sector remains weak

In November, business activity in the Eurozone declined again, with both the services and manufacturing PMIs entering contraction territory. New orders fell for the sixth consecutive month, with the decline continuing to widen, and business confidence dropped to its lowest level in a year.

Germany's services sector weakened again, with the decline in business activity reaching the fastest pace in nine months. The level of business activity in the French private sector fell for the third consecutive month, with the rate of contraction being the fastest since January this year; manufacturing output shrank significantly, hitting a new low for the year.

On the 22nd, S&P Global and Hamburg Commercial Bank (HCOB) released the preliminary PMIs for the Eurozone, Germany, and France for November.

• Eurozone November manufacturing PMI preliminary value 45.2, expected 46, previous value 46.
• November services PMI preliminary value 49.2, expected 51.6, previous value 51.6.
• November composite PMI preliminary value 48.1, expected 50, previous value 50.

In November, both manufacturing and services output in the Eurozone experienced negative growth for the first time, ending the growth trend that had persisted since the beginning of the year. Among them, the decline in manufacturing was particularly significant and further widened compared to October, marking a continuous decline for 20 months. The decline in services was relatively smaller.

The slowdown in production activity reflects weak market demand. New orders fell for the sixth consecutive month in November, reaching a new low since 2024. Both manufacturing and services saw a significant shrinkage in new business. New business from overseas also shrank significantly, especially export orders, which saw the largest decline since the end of last year.

In terms of prices, in November, the inflation rate of input costs in the Eurozone rose to the highest point in three months but remained below the overall average level for the year. The increase in output prices was lower than the average level for the first 11 months of the year. The rise in service costs sharply contrasted with the decline in manufacturing sales prices. Overall, product prices in Germany, France, and other Eurozone countries increased.

Regarding employment, Eurozone companies reduced job positions. Employment in manufacturing shrank significantly, with the decline reaching the highest level since August 2020, while employment in services continued to grow, with the growth rate being the fastest in nearly four months. Although overall employment in Germany decreased, France and other Eurozone countries achieved an increase in employment numbers.

There are still signs of overcapacity among companies, with the volume of unfinished orders decreasing again. The latest data shows that the decline in unfinished orders is the largest since January this year.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, stated:

“ In November, the Eurozone economy fell into stagflation: On one hand, economic activity is contracting across the board, while on the other hand, input and output prices are accelerating.

The surge in service costs, particularly the closely related wage increases, is the main reason driving inflation acceleration. The persistently high sales prices in the services sector pose a significant challenge for the European Central Bank. In this context, some central bank members may advocate for a pause in interest rate hikes in December, but most may still lean towards a slight rate cut of 25 basis points. **

At the same time, the decline in manufacturing purchasing prices in November has narrowed. If the euro continues to weaken and the EU's countermeasures against potential tariffs from the U.S. take effect, purchasing prices may even rise in the coming months.”

After the data was released, traders raised their expectations for the European Central Bank's easing. A rate cut of 31 basis points is expected in December, with a total cut of 145 basis points by the end of 2025, compared to previous expectations of 29 basis points and 139 basis points before the data was released.

The euro fell below the 1.04 mark against the dollar for the first time since 2022; the yield on Germany's 2-year government bonds fell by 5 basis points to 2.06%, the lowest level since October 24.

Germany's Private Sector Business Activity Shrinks More Than Expected in November

Germany's service sector is once again weak, with the decline in business activity reaching the fastest pace in nine months:

• Germany's November Composite PMI preliminary value is 47.3, expected 48.7, previous value 48.6.
• November Services PMI preliminary value is 49.4, expected 51.7, previous value 51.6.
• November Manufacturing PMI preliminary value is 43.2, expected 43, previous value 43.

Germany's November Composite PMI Output Index has been below the boom-bust line of 50 for the fifth consecutive month, indicating a continued contraction in the economy. Compared to October, the index further dropped to 47.3, accelerating the pace of economic decline.

The number of new orders has significantly decreased. The production of goods and manufacturing output showed a marked slowdown in the middle of the last quarter of last year, becoming one of the main factors dragging down the overall economy. Manufacturers are generally facing a shortage of new orders. Although manufacturing output has slowed for the second consecutive month and dropped to its lowest level since June, historically, the pace of decline in factory output is relatively slow.

Due to the decrease in orders, operational pressure on businesses has increased, forcing them to further lay off employees, leading to a continued deterioration in the employment situation. The scale of layoffs in the service sector is relatively small, which has slowed the overall pace of layoffs, but it still reached a new high in four and a half years.

In terms of prices, inflationary pressures in Germany have risen in the middle of the fourth quarter. Especially in the service sector, as operating costs have significantly increased, businesses have had to raise service prices to maintain profits, with the increase reaching a new high in recent months. This indicates that the development of the service sector has exacerbated inflation to some extent.

However, the manufacturing sector is facing the dilemma of weak demand. Weak customer demand, coupled with pressure on the entire supply chain, has led to a further significant decline in manufacturers' factory prices and procurement costs, even showing a trend of accelerated decline.

Cyrus de la Rubia stated:

"Although the decline in the manufacturing sector has eased, the road to recovery remains long. The wave of layoffs among commodity producers is intensifying, which corresponds to the recent significant cost-cutting measures taken by several automotive companies and suppliers. Export orders have also shrunk again.

However, the situation may change in the coming months, as the threat of increased tariffs on exported cars and machinery from the United States may prompt some orders to be placed earlier to avoid additional tariff costs."

French Manufacturing Output Shrinks Significantly, Service Sector Shrinks at Fastest Rate Since January

Business activity levels in the French private sector have declined for the third consecutive month, with the rate of contraction being the fastest since January of this year; manufacturing output has shrunk significantly, reaching a new low for the year.

• France's November Services PMI preliminary value is 45.7, expected 49, previous value 49.2.
• November Manufacturing PMI preliminary value is 43.2, expected value 44.5, previous value 44.5.
• November Composite PMI preliminary value is 44.8, expected 48.3, previous value 48.1.

In the middle of the fourth quarter, the economic situation in France's manufacturing and service sectors has further deteriorated. Manufacturing output has shrunk significantly, reaching a new low for the year, primarily dragged down by the automotive, construction, and cosmetics industries, as well as weak international markets. In the service sector, political and economic uncertainties have led to insufficient consumer confidence, significantly slowing service sector activity, the fastest since January of this year.

In November, the volume of new orders for French private enterprises further declined, with poor sales across the industry. Among them, orders from abroad sharply decreased, significantly negatively impacting overall demand. The volume of new export business experienced the fastest decline since May 2020. Geopolitical uncertainties and weakened order inflows from the United States are the main reasons for this situation.

The latest survey shows that the volume of unfinished business has declined for 16 consecutive months. Moreover, the speed of order reduction has reached the fastest level in four years, with significant decreases in both manufacturing and service sector backlogs.

In terms of prices, in November, the cost pressures faced by businesses across France further intensified. The growth rate of operating costs reached a three-month high, although inflation rates remain relatively mild compared to the overall average. Rising wage costs have led to an overall increase in production costs. Nevertheless, proactive price increases by service providers have somewhat offset this trend. Competitive pressures have caused factory gate prices to fall at the fastest rate in 15 months.

It is noteworthy that French businesses generally expect economic activity to continue weakening in the near future, a trend that may persist until 2025. This pessimistic sentiment can be traced back to May 2020, when businesses' output expectations for the next 12 months first turned negative.

Hamburg Commercial Bank economist Tariq Kamal Chaudhry stated:

"The French Ministry of Industry is facing severe challenges. In November this year, the manufacturing output index has fallen to its lowest point of the year, indicating an overall weakness in the industry. Surveys show that sectors such as automotive, construction, and cosmetics are particularly struggling, with both domestic and international orders shrinking. At the same time, despite weak market demand, manufacturers' input costs have risen sharply, while product prices are declining, further exacerbating the operational pressure on businesses.

The service industry continues to shrink. The situation for French service providers is not optimistic, facing severe challenges similar to the industrial sector. Survey results indicate that the decline in demand is due to the current complex political and geopolitical situation."