France's private sector contraction drags eurozone growth to four-month low

France's private sector contracted in October, ending a one-month growth period and dragging eurozone business activity to a four-month low. The country's composite Purchasing Managers' Index dropped to 48.4 from 51.1 in September, falling below the 50.5 forecast and signaling a return to contraction. Both the services and manufacturing sectors shrank, with the services PMI at 48.4 and manufacturing at 49.3, its lowest in 11 months.

New orders in France fell at their fastest pace since May. Export business declined for an eleventh consecutive month. French businesses cut staff for the sixth month in a row, primarily by not filling vacancies and allowing temporary contracts to expire. Expectations for the next 12 months among French companies fell to their lowest level since April 2020.

Bond market stress intensifies amid political uncertainty

French government borrowing costs rose sharply in October, with the 10-year yield hitting 5.14%, its highest since 2002. The gap between French and German 10-year bond yields stood at 170 basis points, more than double the 78 basis points recorded in early August. This volatile political situation and spike in government borrowing costs meant the downturn in the French composite PMI weighed on the overall picture, according to economist Rory Fennessy.

Joe Hayes of S&P Global Market Intelligence said the data "reflects firms' concerns about what is shaping up to be a highly uncertain 2027 Presidential Election, compounding pre-existing worries about France's fiscal situation." Business confidence in France deteriorated to its lowest since 2012, excluding the pandemic period.

Eurozone growth remains uneven with France's downturn posing risks

While the eurozone continues expanding, growth is increasingly uneven. Germany's composite PMI eased to 52.8 from 53.8 in September, below the 53.3 forecast. Its manufacturing sector improved, with the PMI rising to 54.2, but services weakened to 51.7. Across the eurozone, the composite PMI moderated, with new orders increasing at their slowest pace in the current four-month expansion.

Employment in the bloc was virtually unchanged, with services hiring slowing to a five-month low and manufacturing employment declining slightly. Business confidence fell to its lowest since May.

Cost pressures and supply chain strains persist

Manufacturers across the region reported higher prices for energy, fuel, and transport. Manufacturing input cost inflation accelerated to its fastest pace since May. Supplier delivery times lengthened at their fastest rate in four months. German manufacturers reported the fastest increase in input costs since May, particularly for oil, raw materials, and electronic components. Brent crude traded near $114 a barrel, adding pressure on energy-intensive industries.

Despite these rising input costs, selling-price inflation moderated across the Eurozone. Higher interest rates are dampening demand, according to analysts. The European Central Bank is considering more aggressive policy tightening due to stubborn inflation. The expectation is that France's economic weakness will persist into 2027 amid political uncertainty and elevated borrowing costs.