Eurozone flash PMI’s rise at the slowest pace in 18-months

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The latest flash PMI estimates covering manufacturing and services sectors released by Markit last week showed that the level of activity hit the lowest in a year. The flash data covers the month of May and underlined the fact that the Eurozone’s economic activity continues to slow.

Worries about a slowdown in the global economy still remain on lower consumer spending and low inflation despite higher oil prices. This coincides with the monetary policy plans of the ECB which is looking to tighten monetary policy in the near future.

The flash composite PMI for the Eurozone showed that the index declined to 54.1 in May. In April, the index was registered at 55.1. This was weaker than the median estimates and was seen falling to a 15-month low. Services PMI activity registered an index of 53.9 while manufacturing sector registered 54.5 on the index. Both the readings were the lowest in a year.

Eurozone Composite PMI
Eurozone (Flash) Composite PMI: 54.1 (Source: Tradingeconomics.com)

Data showed that input cost inflation had accelerated to a three month high. This came on the back of higher energy prices. However, the higher input costs were seen as putting a squeeze on consumers amid a period of low wages. The effect of higher input costs were felt on firms rather than reflecting an increase in consumer prices.

The companies that participated in the surveys said that it was difficult to hike consumer prices due to weak demand. The data comes at a time when the Eurozone economy registered slow economic growth in the first quarter. Economists and market watchers attributed this slow patch to temporary reasons such as bad weather and the outbreak of flu. However, the weak patch of data continues into the second quarter as well.

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There has been no evidence of a pickup in the sentiment indicator in the first two months of the second quarter. This suggested that the underlying slowdown might be stronger than expected. Still, some attribute the weakness in May due to the number of holidays during the month.

Based on the latest data, expectations call for a 0.4% quarterly GDP growth in the third quarter. But further slowdown could signal even slower pace of GDP growth. The Eurozone economic activity expanded at a pace of 0.4% in the first three months of the year. This was a sharp slowdown compared to 0.7% increase in the final quarter of 2017.

Although the composite PMI’s fell to a yearly low, the fact that it remained above the 50-index level suggests continued expansion. The rate of expansion was seen cooling for the fourth consecutive month.

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Chris Williamson, the chief economist for the IHS Markit said that the PMI results for May were once again disappointing but said that one should exercise caution when interpreting the numbers. Williamson said that while there were many factors attributed to the previous month’s PMI readings, business in the month of May suffered due to holidays, in an effort to brush aside concerns.

Eurozone officials maintain the economy will pick up in the coming months. However, concerns remain on slowdown from Germany, which is the Eurozone’s largest economy. German growth was seen slowing to a 20-month low while France was also experiencing a slowdown as well. Meanwhile, unemployment rate in France was seen rising to a three month high in 2018.

This comes at a time when the European Central Bank is contemplating an end to its QE program. The current pace of QE purchases at 30 billion euro a month is expected to end in December 2018. Some officials of the ECB also gave a rough estimate of 9 – 12 months for the first rate hike after the ECB ends QE.

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