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Friday’s survey showed that growth in business activity in the euro zone has slowed this month as companies face rising costs due to supply chain restrictions, while the bloc’s dominant service industry struggles amid persistent COVID-19 concerns.
IHS Markit’s composite PMI, a good measure of overall economic health, fell to a six-month low of 54.3 in October from 56.2 in September.
That matches the lowest forecast in a Reuters poll and predicted a more moderate drop to 55.2 but still comfortably above the 50 mark that separates growth from contraction.
“The sharp slowdown in October means the eurozone starts the fourth quarter with the weakest growth momentum since April,” said Chris Williamson, chief business economist at IHS Markit.
“While the overall rate of economic growth remains above the long-term average at the moment, risks appear to be skewed to the downside in the near term as the pandemic continues to disrupt economies and push prices higher.”
Supply chain bottlenecks caused by the coronavirus pandemic, along with a shortage of heavy-goods vehicle drivers, has sent the input price index jumping to 73.1 from 70.9, the highest level since the survey began in mid-1998.
The services PMI fell to 54.7 from 56.4, the lowest level since April, and below the 55.5 forecast in a Reuters poll.
But companies have taken in employees at the fastest rate in more than 14 years. The employment index rose to 56.0 from 54.1.
Manufacturing activity remained strong and the factory-only PMI fell from 58.6 in September to 58.5 although the output gauge, which feeds into the composite PMI, fell to 53.2 from 55.6, the lowest level since June 2020.
Raw material factory prices need to increase at a record pace, and while manufacturers have passed on some of these costs to customers, they have not been able to shift the entire burden. The Producer Price Index rose to 72.3 from 70.4, the highest level since IHS Markit began collecting data in late 2002.
“Average selling prices for goods and services are rising at a rate not seen in more than two decades, which will inevitably drive up consumer prices in the coming months,” Williamson said.
This suggests that the recent spike in inflation is not going away anytime soon, arguing in the ECB’s view that the rise will be temporary.