Euro zone factory activity boomed in October as Germany roared

MACROECONOMICS - LONDON. Manufacturing growth in the euro zone soared in October but the recovery from severely depressed activity at the height of the coronavirus pandemic was again mostly driven by a buoyant Germany, a survey showed.

Also likely of concern to policymakers, and highlighting a further divergence in the recovery, a flash reading of the overall survey showed activity in the bloc's dominant service industry contracted last month as a second wave of the virus swept across Europe.

Still, IHS Markit's final Manufacturing Purchasing Managers' Index climbed to 54.8 in October from September's 53.7, its highest reading since July 2018 and ahead of the 54.4 flash estimate. Anything above 50 indicates growth.

An index measuring output, which feeds into a Composite PMI due on Wednesday and seen as a good gauge of economic health, bounced to 58.4 from 57.1 in September, comfortably beating its 57.8 flash reading.

"Euro zone manufacturing boomed in October, with output and order books growing at rates rarely exceeded over the past two decades. However, while the data bode well for production during the fourth quarter, the expansion is worryingly uneven," said Chris Williamson, chief business economist at IHS Markit.

"Germany was once again the star performer by a wide margin, as factories reported a surge in new orders that surpassed anything previously seen in the survey's 25-year history."

But Germany, like some of its peers in the bloc, has recently imposed controls almost as strict as the lockdowns of the first phase of the crisis suggesting at least some of that manufacturing activity might be curtailed.

There is a high risk the resurgence in coronavirus now underway across Europe would halt the nascent euro zone recovery, a recent Reuters poll showed.

The euro zone economy contracted 11.8% in the second quarter, when many businesses were closed and citizens urged to stay home. But it expanded a much-better-than-expected 12.7% last quarter after many lockdown restrictions were eased, official data showed on Friday.

Demand soared in October and factories were able to build up a healthy backlog of work. Optimism waned, however, and as in every month since May 2019, headcount was reduced, the PMI showed. The future output index fell to 62.7 from 63.8.

"While manufacturing as a whole may be booming for now, the sustainability of the recovery will depend on household behaviour returning to normal and labour markets strengthening," Williamson said. "Given second waves of virus infections, this still looks some way off."