The headline RBS/NTC Flash Eurozone Composite Output Index fell from 57.4 in August to 54.5, dropping for the third successive month to reach a two-year low. The month-on-month decline in the Index was the second-largest recorded since the survey began in July 1998 – exceeded only by that seen in the immediate aftermath of 9/11 in October 2001. Growth of output eased only slightly in manufacturing but a far steeper downturn was recorded for services, which showed the sharpest monthly deceleration in activity growth recorded in the sector over the nine-year history of the survey. Growth hit a 22-month low manufacturing and a 25-month low in services.

Growth of incoming new business slowed markedly, down for the second month running to hit a 25-month low. The monthly slowdown was the steepest seen in the survey’s history. The overall weakening of incoming new business growth reflected particular a record slowdown in growth of service sector new business, which dropped further from July’s seven-year high to the weakest for 22 months. Growth of new orders in manufacturing also slowed sharply, dropping for the third successive month to a 25-month low. The slower growth of new business resulted in backlogs of work showing the smallest rise for two years.

Despite the drop in new business growth, private sector companies continued to take on extra staff. Employment across the combined manufacturing and service sectors rose for the twenty-fifth month running in September. The rate of increase dipped to a five-month low, down for the second month from July’s six-and-a-half year high, but remained strong and in line with the average seen over the year to date. The service sector continued to record the stronger pace of workforce expansion, in spite of the rate of increase turning down to a five-month low. Employment growth at manufacturers remained weak, though was marginally higher than August’s 10-month low.

Prices: input and output price inflation ease to 10-month lows

Input price inflation dipped to a 10-month low, with manufacturers reporting the weakest rate of increase for two years. Input cost inflation in services picked up slightly, driven up by higher interest rates, rising wage pressures and higher transport prices.

Output price inflation also slowed to a 10-month low, though remained strong by historical standards of the survey, with both manufacturing and services recording similar rates of increase. The rate of increase slipped to a 19-month low manufacturing and four-month low in services.

Source: NTC Economics

“The decline in the PMI suggests that the downside risks that the ECB had been considering are now at least partially materialising. The magnitude of the impact is sufficiently large to push us to reconsider the outlook for interest rates in the euro area. We now anticipate that the ECB will cut rates by 50 basis points in the course of 2008.”

The Eurozone PMI (Purchasing Managers' Index) is produced for RBS Global Banking & Markets by NTC Economics and is based on original survey data collected from a representative panel of 5000 companies based in the euro area manufacturing and service sectors. The flash estimate is typically based on approximately 85-90% of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data.

The average differences between the flash and final PMI index values (final minus flash) since comparisons were first available in January 2006 are as follows (differences in absolute terms provide the better indication of true variation while average differences provide a better indication of any bias):

The Purchasing Managers’ Index (PMI) survey methodology has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries (including the European Central Bank) use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.

Key indicator notes

1. The Composite Output Index is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.

2. The Services Business Activity Index is the direct equivalent of the Manufacturing Output Index, based on the survey question “Is the level of business activity at your company higher, the same or lower than one month ago?”

3. The Manufacturing PMI is a composite index based on a weighted combination of the following five survey variables (weights shown in brackets): new orders (0.3); output (0.25); employment (0.2); suppliers’ delivery times (0.15); stocks of materials purchased (0.1). The delivery times index is inverted.

4. The Manufacturing Output Index is based on the survey question “Is the level of production/output at your company higher, the same or lower than one month ago?”