UK resilience contrasts with the eurozone’s policy dilemma
October's flash PMIs split Europe in two.
Eurozone growth slowed to a four-month low as demand stalled and firms absorbed rising energy costs through their margins, the bind our preview flagged. The UK moved the other way, with activity at an eight-month high and hiring back. That widens the policy gap ahead of the ECB on October 29 and the BoE on November 5, and tilts GBPEUR higher.
The eurozone composite fell to 51.9 from 53.1, below a Bloomberg consensus of 52.7. Services slowed to 51.7 from 53.0 and manufacturing to 52.4 from 52.9, but the more telling figure is composite new orders, down to 50.7 from 52.4, leaving demand barely expanding.
France led the weakness, its composite back in contraction at 48.4 from 51.1 and confidence at the lowest since 2012 outside the pandemic, as political and financial strain bites. Input costs accelerated for a second month, yet firms raised selling prices more slowly, and hiring came close to a standstill. That is margin compression, not pricing power.
Granted, the survey compiler reads sustained growth and sticky costs as fuel for more aggressive ECB tightening.
But the same survey finds higher rates already dampening demand, and tightening into a margin squeeze risks deepening the slowdown while the energy shock is still feeding through. We see today's data as strengthening the case for ECB caution on October 29, without removing the risk that persistent energy pressures force further hikes later.
The UK told the opposite story. The composite rose to 53.1 from 52.0 against a consensus of 51.7, with services at 53.1 and manufacturing at 52.8, all three above the highest forecast survey.
Demand drove it: new orders jumped to 53.1 from 50.4, the strongest since September 2024, and employment improved for the first time since autumn 2024. Admittedly, output price inflation eased while input costs kept rising. Both are squeezing margins. Only Britain has the demand to rebuild them. Landing on top of a firmer-than-expected September CPI and improving labour market data, this is no longer a one-month story.
For FX, the divergence favours sterling over the euro, and GBPEUR has already climbed to a 17-month high.
With markets pricing a November BoE hike at 95%, delivery alone adds little; the meeting becomes less about whether the Bank hikes, and more about whether it signals another. We see GBPEUR risks skewed higher into both meetings. Two developments would challenge that view: an ECB that leans hawkish on October 29 despite the demand squeeze, or signs that an expected jump in UK household energy bills early next year is already denting the recovery.
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