By Jonathan Cable
LONDON (Reuters) -Euro zone business activity took a surprise turn for the worse this month as demand fell in a broad-based downturn across the region, a survey showed, entering the fourth quarter on the wrong foot and suggesting the bloc may slip into recession.
Tuesday's purchasing managers' survey will likely make disappointing reading for the European Central Bank, which meets on Thursday, and market pricing now suggests ECB President Christine Lagarde's 'higher-for-longer' interest rate narrative may not last as some expect.
HCOB's flash euro zone Composite Purchasing Managers' Index (PMI), compiled by S&P Global and seen as a good guide to overall economic health, fell to 46.5 in October from September's 47.2 and its lowest since November 2020.
Outside of the COVID-19 pandemic months it was the lowest reading since March 2013.
It was well below the 50 level that marks growth in activity and confounded expectations in a Reuters poll for an uptick to 47.4.
"The flash PMIs mark a poor start to October for the euro zone, especially after showing some early signs of recovery in September," said Rory Fennessy at Oxford Economics.
"If this trend continues, this poses downside risks to our stagnant growth forecast for Q4."
Suggesting a recession is well underway in Germany, Europe's largest economy, business activity contracted there for a fourth straight month as the downturn in manufacturing was matched by a renewed decline in services, its PMI showed.
Meanwhile, German consumer sentiment is set to fall for a third month in a row in November, ending any hopes of a recovery this year as households grapple in particular with high food prices, another survey showed on Tuesday.
Business activity across France, the euro zone's second largest economy, saw another solid reduction in October, PMI data showed. While the contraction softened from September, it was still the second-steepest decline in close to three years, S&P Global said.
In Britain, outside the European Union, businesses reported another decline in activity this month, underlining the risk of recession ahead of the Bank of England's interest rate decision next week.
OUTLOOK DARKENS
Geopolitical tensions heightened by the Middle East conflict pose the biggest threat to the world economy right now but other risks are also at play, World Bank President Ajay Banga said on Tuesday.
There are fears Israel's military campaign in Gaza following a deadly attack by Palestinian militant group Hamas on Oct. 7 may escalate to a regional conflict and Russia's invasion of Ukraine is ongoing.
While the 20-country euro zone will narrowly dodge a recession, according to a recent Reuters poll, the economy was expected to have only flatlined last quarter and will do the same again in the current one.
Euro zone banks further curbed access to credit last quarter even as demand fell more than expected amid high borrowing costs and a deteriorating economic outlook, an ECB survey showed on Tuesday
A chunk of October's business activity was generated by firms completing backlogs of work and, suggesting they don't expect a turnaround anytime soon, overall headcount was cut for the first time since January 2021.
The PMI covering the bloc's dominant services industry sank to a 32-month low of 47.8 from 48.7, below all forecasts in the Reuters poll which had predicted no change from September.
Demand for services has fallen again this month and at a sharper rate than in September. The new business index dropped to 45.5 from 46.4, its lowest since the start of 2021.
The manufacturing PMI fell to 43.0 from 43.4, marking its 16th month below 50 and the lowest since May 2020 when the pandemic was cementing its grip on the world. The Reuters poll had predicted 43.7.
An index measuring output held steady at 43.1.
Suggesting there won't be a turnaround anytime soon, forward looking indicators in the survey painted a gloomy picture.
Optimism about the coming 12 months among factory managers waned, with the future output index dropping to 50.3 from 51.6, marking its lowest reading this year.
"These surveys do nothing to change our view that the euro zone economy is likely to contract in Q4 after probably contracting in Q3," said Andrew Kenningham at Capital Economics.