Euro-Area Companies Downbeat on Trade and Political Tension

(Bloomberg) -- Euro-area companies entered the final stretch of 2018 the most despondent in almost four years, burdened by protectionism and sliding markets.

IHS Markit's Purchasing Manager's Index for manufacturing and services fell to 53.1 in October, the worst since September 2016, and a gauge of the business outlook fared even worse.

“Expectations have slumped to the bleakest since the end of 2014,” said Chris Williamson, an economist at IHS Markit. “An export-led slowdown, linked to growing trade tensions and tariffs, has been exacerbated by rising political uncertainty, growing risk aversion and tightening financial conditions.”

The data signal that the euro area's third-quarter weakness is extending into the final three months of the year, causing a problem for European Central Bank policy makers who are trying to orchestrate a gradual exit from their stimulus. They'll next meet to set policy on Dec. 13.

The PMI numbers were slightly better than the initial reading had indicated, and Williamson said that suggests the bloc's third-quarter growth of 0.2 percent -- the feeblest in four years -- might be revised upward.

At the same time, “it's clear that the economy has slowed and that the weakness has intensified into the fourth quarter.”

Among the region's four biggest economies, private-sector activity cooled in Germany and contracted in Italy. France and Spain saw an improvement.

One bright spot in Tuesday's data was German factory orders, which unexpectedly rose for a second month in September. Orders from within the euro zone for investment goods surged, which may signal that companies are attempting to overcome capacity constraints.

The ECB has said that price pressures are building as slack in the economy is used up, backing its view that its bond-buying program can be capped at the end of December.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Andrew Atkinson

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