France's return to growth lasted just one month. Business activity contracted again in October, while confidence among French companies fell to its lowest level since the first Covid-19 lockdowns in 2020.
The drop pulled the wider eurozone down with it.
The eurozone's composite purchasing managers' index (PMI), which measures activity across manufacturing and services, fell to 51.9 in October from 53.1 in September.
It was the weakest reading in four months, although the index remains above 50, the threshold separating growth from contraction. Economists had expected a smaller decline to 52.7.
The services and manufacturing indices also came in lower than expected, albeit still signalling modest expansion.
The latest survey suggests Europe's recovery is losing momentum just as inflation is making it harder for the European Central Bank (ECB) to ease borrowing costs.
So is this a pause in growth, or the start of something worse?
What went wrong in France?
France recorded the sharpest deterioration among the eurozone's two largest economies. Its composite PMI dropped to 48.4 from 51.1 in September, well below the 50.5 economists had forecast.
The services activity index fell to 48.4, while the manufacturing index slipped to 49.3, its lowest level in 11 months.
Companies reported that customers were postponing projects and delaying spending decisions. New orders fell at their fastest pace since May, and export business declined for an eleventh consecutive month.
Employment fell too.
French businesses cut staff for the sixth month running, largely by leaving vacant positions unfilled and allowing temporary contracts to expire.
But the figures on business confidence were considerably worse. Expectations for the next 12 months fell to their lowest level since April 2020, when the pandemic had brought much of the French economy to a halt.
The survey also recorded negative business expectations for the first time in almost two years.
Joe Hayes, senior principal economist at S&P Global Market Intelligence, linked the deterioration to France's political and fiscal problems.
The sentiment reading, he said, "reflects firms' concerns about what is shaping up to be a highly uncertain 2027 Presidential Election, compounding pre-existing worries about France's fiscal situation."
France's political uncertainty has been accompanied by a sharp increase in government borrowing costs. That matters for businesses because rising interest rates make loans more expensive and can discourage investment, even without further ECB rate increases.
"Unsurprisingly, the volatile political situation and spike in government borrowing costs meant the downturn in the French composite PMI weighed on the overall picture," said Rory Fennessy, senior economist at Oxford Economics.
France had only returned to growth in September after months of contraction. The October numbers suggest that recovery has already run out of steam.
Is Germany holding up any better?
Germany offered a more encouraging picture, although growth also slowed.
The country's composite PMI eased to 52.8 from an 11-month high of 53.8 in September. Economists had expected 53.3.
Factories continued to expand. Germany's manufacturing PMI rose to 54.2, its highest reading in two months, supported by export orders and government spending on defence and infrastructure.
Services were weaker, with the index falling to 51.7. Companies in that sector reported that customers were delaying decisions and holding back spending as budgets tightened.
Phil Smith, economics associate director at S&P Global Market Intelligence, said the slowdown "underscored that the recovery in the eurozone's largest economy remains fragile."
Germany's factories also face a problem that could become more serious in the coming months. Manufacturers reported the fastest increase in input costs since May, particularly for oil, raw materials and electronic components.
Brent crude was trading near $114 a barrel on Friday, adding to the pressure on energy-intensive industries.
Confidence among manufacturers fell to its lowest level since July.
"A renewed surge in cost pressures has dampened expectations across the sector, with the two likely to remain intrinsically linked in the months ahead," Smith said.
Germany is benefiting from stronger factory orders, but companies are increasingly concerned about how much it will cost to fulfil them.
Why rising prices are becoming a problem for the ECB
The increase in costs extends beyond Germany. Across the eurozone, manufacturers reported higher prices for energy, fuel and transport, while supplier delivery times lengthened by the most in four months.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the survey still points to quarterly GDP growth of around 0.3%. But "higher interest rates are also starting to take a toll, dampening demand," he said.
With inflation remaining stubborn, Williamson said the figures "will likely add to further speculation of more aggressive policy tightening from the ECB."
That could mean higher borrowing costs for businesses and households, even as economic growth slows.
French stocks and bonds remain under pressure
France's CAC 40 fell 0.7% on Friday morning to around 7,750 points, more than 11% below its 10 August closing high.
Italy's FTSE MIB was broadly flat after Thursday's 2.5% decline, and is also down more than 10% from its August peak.
French government bonds have suffered an even sharper sell-off. The 10-year yield reached 5.14% on Thursday, its highest since 2002, before easing to around 5.04% on Friday.
The gap with German 10-year yields stood at 170 basis points, more than double the 78 basis points recorded in early August.
France now also pays around 45 basis points more than Italy to borrow for ten years. The euro was also under pressure, trading near $1.12, more than 4% below its August high.
A weaker euro can make imported energy more expensive, adding another source of inflation at a time when European manufacturers are already paying more for fuel and materials.
Is Europe heading for another recession?
The October business surveys are disappointing, but they do not yet suggest the eurozone is heading into recession.
There are, however, reasons to be cautious.
French companies are facing political uncertainty and rising borrowing costs. German manufacturers are struggling with higher energy prices, while businesses across the region are reporting weaker demand.
The ECB must now decide how much further it can raise borrowing costs to contain inflation without causing more damage to growth.
September's strong business surveys had raised hopes that Europe's recovery was finally gaining ground.
The October figures have called that into question, particularly in France, where companies are already cutting jobs and reporting their weakest expectations in more than six years.