The flash PMI data compiled by S&P Global Market Intelligence signaled sustained growth as measured collectively among the world's major developed economies in October - the 'G4'. The US continued to outperform as both the eurozone and Japan contracted, and growth faltered to only a modest pace in the UK. The overall pace of growth consequently slipped to a six-month low.

The slowdown came amid further signs of weakness spreading from manufacturing to services, with only the US's service sector retaining any encouraging degree of resilience.

Increasingly depleted backlogs of work across the G4 meanwhile led to a drop in employment for the second time in the past three months, with labour markets softening across all four economies.

Some encouragement comes as business confidence about output in the year ahead revived from a slump seen in September, though any improvement was limited to the US as geopolitical concerns intensified elsewhere.

Softening demand conditions meanwhile fed through to lower selling price inflation, which slipped across the four largest developed economies to a four-year low.

These weaker price pressures provide some additional scope for more aggressive approaches to monetary policy easing, should demand environments continue to deteriorate.

G4 economy resilient but services growth wanes amid manufacturing decline

Flash PMI data from S&P Global Market Intelligence showed the major developed economies continued to collectively grow in October, sustaining the expansion that has been recorded in the year to date. Although the rate of growth both at the start of the fourth quarter and the year to date represents a marked improvement on the comparable performance seen in 2023, October saw output growth moderate for a second successive month, slipping to a six-month low.

The pattern of growth also remains worryingly uneven by sector. October's flash PMIs showed manufacturing output contracting for a fifth successive month collectively across the G4, leaving the upturn wholly dependent on the services economy. Service sector output rose for a twelfth consecutive month in October, but the rate of growth was the weakest since April. These data therefore hint at signs that the recent manufacturing malaise is increasingly spilling over to the services economy.

US outperforms as eurozone and Japan report falling output

The flash PMI also showed an ongoing marked divergence among the G4 economies. The US again reported the strongest expansion, outpacing the other major developed economies for a sixth successive month, and was the only one of the four to report an improved rate of expansion (albeit only marginally). Output meanwhile contracted in both the eurozone and Japan, the former reporting a second successive drop in output while Japan reported the first deterioration since June. Output growth in the UK meanwhile slipped to the lowest since November.

Key to the US's stronger performance was the resilience of its services economy, where robust output growth was recorded despite manufacturing output declining for a third straight month.

In contrast, services activity contracted in Japan during October, down for the first time in four months, and services growth slowed to only very modest rates in both the eurozone and UK, down to eight- and 11-month lows respectively. These worsening services performances appear to have in part reflected the knock-on effect of weakened manufacturing economies. Of the G4, only the UK reported higher manufacturing output in October, and even here the rate of expansion sank to a six-month low to register only a very modest increase.

Employment falls amid depleted order books

This uneven growth, and the signs of spreading malaise from manufacturing to services, raises questions over the sustainability of the current expansion across the G4 economies. Such worries are further fueled by a sharp fall in backlogs of work across the G4 in October.

The volume of orders not yet started or completed in these economies fell in October at the steepest rate since last December, hinting of the development of excess capacity: current output levels are only being sustained by firms increasingly eating into orders placed in prior months.

This depleted volume of orders prompted firms across the G4 to cut employment for the second time in the past three months. With September having seen no change in headcounts, there has been no employment growth recorded across the G4 since July.

Employment fell in the US, eurozone and UK in October, albeit only modestly in all cases, while the marginal increase seen in Japan was the smallest recorded for over a year, highlighting a broad-based softening of the labour markets in the major developed economies.

Confidence boost

There was better news from the sentiment side of the flash PMI surveys, with companies' views about their expected output in 12 months' time recovering from a slump in September, which had seen optimism across the G4 economies hit a 22-month low. October's reading was the highest since June.

However, the improvement was limited to the US, with future expectations falling elsewhere, largely linked to geopolitical worries. Companies cited uncertainty regarding the US election, including trade and protectionist-related policies, as well as domestically focused government policy uncertainties - notably in the UK but also in the eurozone. Conflicts in the Middle East and Ukraine also continued to dampen sentiment. In the US, the rebound in part reflected hopes of greater stability post-election.

Clearly the outlook remains cloudy, and much depends on the political environment, but the fact that sentiment did not drop further in October is a welcome relief.

Selling price inflation at four-year low

The depletion of order books meanwhile helps explain a further moderation of price pressures in October. Average prices charged for goods and services rose across the G4 economies in October at the slowest rate for four years. Notably, at 52.0, the current G4 PMI Prices Charged index is now only modestly above its pre-pandemic decade average of 51.2, suggesting the rate of inflation no longer remains particularly elevated by historical standards.

Companies have reported reduced pricing power amid greater competitive forces, but lower input cost inflation has also facilitated lower selling price inflation. Average input costs across goods and services in the G4 rose in October at the joint-slowest rate seen for almost four years.

An especially encouraging aspect of the recent cooling in selling price inflation was the focus on slower growth of service sector charges, which rose across the G4 in October at the slowest rate since October 2020. After the initial wave of manufacturing-related inflation during the pandemic, the post-pandemic (or post-COVID vaccine) period has been characterised by elevated service sector inflation. However, the recent PMI data suggest this service-sector driven stickiness of inflation is now ending, with October seeing services prices rising at only a very marginally higher rate than goods prices.

As with output trends, regional divergences were also notable for price trends among the G4, although the pattern of divergences differs. Most notably, whereas the US saw the fastest output growth in October, it is now seeing the slowest rate of price increase, adding to speculation that the US is enjoying a 'soft landing' in the fight against inflation. In contrast, the UK saw the steepest price rises of the G4 economies.

Chris Williamson, Chief Business Economist, S&P Global Market Intelligence

Tel: +44 207 260 2329

chris.williamson@spglobal.com

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Purchasing Managers' Index™ (PMI^®) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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