Business sentiment stabilises, but at a low level

Recent business surveys such as the purchasing managers' indices, point towards a broad-based stabilisation in October.

This is a welcome development after a prolonged downward trend.

However, in a historical perspective, the recent readings are low or, looking at the manufacturing sector, very low. This points to an ongoing subdued growth environment.

Going forward, a sideways movement of these surveys should increase the likelihood of a growth acceleration: when the frequency of bad news drops, confidence should eventually rebound, fuelling spending, all the more so given the very accommodative financial and monetary conditions.

When on holidays, it has been raining for days in row, the mere decline in intensity of the rainfall will be met with relief, triggering hope that sunshine is about to arrive. One would almost forget that, when rushing outside without an umbrella, you will still get wet. It is useful to keep this metaphor in mind when analysing the business survey data for October. Starting with the (rather) good news, in the US, the ISM indices for manufacturing and non-manufacturing rebounded, reaching respectively 48.3 (47.8 in September) and 54.7 (52.6). The IHS Markit purchasing managers' index (PMI) for US manufacturing edged up slightly (51.3 versus 51.1) but the opposite happened with the services PMI (50.6 versus 50.9).

In the eurozone, the manufacturing PMI hardly changed (45.9 versus 45.7 in September). Germany did a bit better, as well as France, but the climate continued to worsen in Spain. Italy was stable. The eurozone services business activity index improved somewhat (52.2 versus 51.6) on the back of a slight uptick in Germany, a healthy increase in France and Italy and a decline in Spain. In China, the Caixin manufacturing PMI increased slightly (from 51.4 to 51.7) but the opposite happened in services. Finally, in Japan, both manufacturing and services weakened further. All in all, with the exception of Japan, the purchasing managers' data suggest that business sentiment is stabilising. In Germany this has also been confirmed by the ifo business climate index which remained stable in October after having been on a downward trend since early 2018. In France on the other hand, the INSEE business climate weakened slightly.

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