Business activity across the eurozone contracted sharply in November, with the services sector joining manufacturing in a downturn that signals the region’s steepest economic decline since January.

The Flash Eurozone Composite Purchasing Managers’ Index (PMI), a key indicator of economic health, dropped to 48.1 from October’s neutral 50.0. This unexpected contraction underscores mounting economic challenges, defying market forecasts of an unchanged reading.

Services Join Manufacturing in Contraction

The services sector, long a pillar of eurozone resilience, fell into contraction for the first time in 10 months. Its PMI dropped to 49.2 from 51.6 in October, while manufacturing continued its prolonged slump, with its PMI falling to 45.2. This marked 20 consecutive months of declining production.

“The eurozone’s manufacturing sector is sinking deeper into recession, and now the services sector is starting to falter,” said Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank. He attributed the struggles to ongoing political uncertainty in the bloc’s largest economies.

Declining new orders, which fell for the sixth straight month, further pressured businesses. Export demand also weakened significantly, leading some firms to cut employment slightly.

Inflation Resurfaces, Complicating ECB’s Path

Despite the slowdown in activity, inflationary pressures intensified. Input cost inflation hit a three-month high, driven by rising service-sector costs, even as manufacturing costs declined.

Output prices accelerated compared to October, creating a challenging environment for the European Central Bank (ECB).

“The eurozone is in a stagflationary environment—activity is declining, yet prices are rising,” de la Rubia explained. He noted that surging service sector prices could complicate the ECB’s monetary policy decisions, with some policymakers potentially advocating for rate cuts in December.

Germany and France Show Deeper Weakness

The eurozone’s largest economies, Germany and France, reported sharper-than-expected contractions in November.

France’s services PMI dropped to 45.7 from 49.2, marking its worst performance since January. Domestic political uncertainty continued to weigh heavily on its economy.

Germany’s services PMI fell to 49.4 from 51.6, its first contraction in nine months. Rising costs, especially wages, compounded challenges for companies.

Market Reaction: Euro, Equities, and Banks Fall

The unexpected economic contraction sent ripples through financial markets. The euro tumbled over 1% against the dollar to $1.04, its lowest since November 2022, as investors anticipated accelerated ECB rate cuts.

Eurozone bond yields also declined, with Germany’s 10-year Bund yield falling eight basis points to 2.25%. Equities followed suit, with the Euro STOXX 50 index dropping 0.7%.

Banks bore the brunt of the selloff, with shares of major lenders such as Deutsche Bank, Societe Generale, and Unicredit falling by 2.5% to 4%. Conversely, defensive sectors like utilities gained, reflecting a shift in investor preference amid economic uncertainty.

ExxonMobil is exploring a potential partnership with Eni of Italy and Total of France to jointly develop significant natural gas deposits located off the southern coast of Cyprus, Cypriot Energy Minister George Papanastasiou announced on Friday.

The collaboration would center on gas fields discovered in close proximity by the companies in Cyprus’s exclusive economic zone (EEZ). According to Papanastasiou, ExxonMobil’s ongoing discussions with the Eni-Total consortium aim to expedite the monetization of these deposits.

Boost from New Exploratory Drilling

The prospect of collaboration could hinge on the success of ExxonMobil’s exploratory drilling at a site dubbed “Pegasus,” set to commence early next year. The well is located near the company’s Glaucus deposit, estimated to contain between 5 and 8 trillion cubic feet (tcf) of natural gas. Glaucus is situated within Block 10, an area jointly held by ExxonMobil and Qatar Petroleum.

Adjacent to this area, in Block 6, the Eni-Total consortium has identified the Cronos deposit, which holds an estimated 2.5 tcf of gas. Papanastasiou suggested that if the Pegasus well yields substantial reserves, infrastructure could potentially link Glaucus to Pegasus for efficient resource development.

In addition, ExxonMobil plans to drill another exploratory well, Electra, in January 2024 in Block 5, located north of Block 10 and west of Block 6. An assessment of these wells is expected by mid-2024, which could determine development strategies for the resources.

Strategic Energy Role

Cypriot officials have highlighted offshore gas as a critical component of Europe’s efforts to diversify energy sources amid the geopolitical fallout from Russia’s war in Ukraine. Following talks with ExxonMobil Vice President for Global Exploration John Ardill, Cypriot President Nikos Christodoulides reiterated the country’s commitment to leveraging its energy potential.

Papanastasiou stated that development options under consideration include converting the gas into liquefied natural gas (LNG) using offshore installations or transferring it to onshore facilities in Cyprus for domestic use and export.

Broader Energy Landscape

Currently, ExxonMobil and Qatar Petroleum hold exploration licenses for two blocks in Cyprus’s EEZ, while the Eni-Total consortium operates in seven blocks. A Chevron-Shell partnership controls one additional block.

President Christodoulides also revealed that Cyprus is in preliminary talks with energy firms from Persian Gulf states regarding potential exploration licenses in its offshore territory.

With new drilling operations and potential international partnerships, Cyprus is positioning itself as a significant player in the global energy market, contributing to regional and European energy security.

Germany’s producer prices fell for the 16th straight month in October, marking a 1.1% decline compared to the same month last year, according to the Federal Statistical Office. The drop, in line with analysts’ expectations, was slightly smaller than the 1.4% decrease recorded in September.

The Producer Price Index (PPI), which measures the average change in selling prices received by domestic producers for goods and services, was primarily affected by a sharp drop in energy prices. Energy costs fell by 5.6% in October from the previous month.

Light heating oil prices saw the steepest decline, plummeting 22.7%, while prices for mineral oil products and natural gas decreased by 12.9% and 10.1%, respectively. Fuel prices dropped 12.1%, and electricity prices were down by 7.3%.

Excluding energy, producer prices rose by 1.3% in October. Prices for capital goods increased by 2%, driven by a 1.4% rise in motor vehicles and parts, and a 2% increase in machinery costs. Durable goods prices edged up 0.9%, while consumer goods prices rose by 1.9%. Intermediate goods prices also saw a slight rise of 0.4%.

On a month-on-month basis, the PPI grew by 0.2% in October, rebounding from a 0.5% decline in September and meeting market forecasts.

Economic Recovery Hopes Amidst Slowing Activity

Despite the drop in producer prices, Germany’s economy remains under pressure due to weakened industrial output and reduced consumer spending, driven by high interest rates and rising living costs.

In its latest forecast, the European Commission projected a 0.1% contraction in Germany’s economy for 2024. “High uncertainty has been weighing on consumption and investment, while the trade outlook has worsened as global demand for industrial goods declined,” the Commission noted.

However, the report highlighted expectations for an economic recovery starting in 2025, with GDP growth projected to rise to 0.7% that year and 1.3% in 2026. The recovery is anticipated to be supported by increases in real wages, bolstering domestic demand.

Inflation in Germany is expected to moderate, averaging 2.4% in 2024 before easing to 2.1% in 2025 and further declining to 1.9% in 2026. Meanwhile, the government deficit is forecast to decrease, and the national debt ratio is expected to stabilize at around 63% of GDP.

The ongoing decline in producer prices offers some relief to businesses, but it underscores the broader challenges facing Germany’s economy as it seeks to rebound from prolonged industrial slowdowns and global trade uncertainties.