Surveys Give Hope on Eurozone Growth

Manufacturing activity contracts, but services rebound in February

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The latest business surveys, measuring activity in the manufacturing and services sector for the eurozone painted a mixed picture.

The overall outlook, however, was one that gave hope of a revival in growth for the region.

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Last week, IHS Markit released the manufacturing and services PMI numbers for February. It was a mixed bag, with manufacturing activity staying weak, but services activity showing a strong rebound.

As a result, the IHS Markit’s eurozone composite PMI rose to 51.9 in February. This was a higher than expected reading after preliminary results showed that the composite PMI rose to 51.4.

In January, the composite PMI came in at 51.0. Most of the gains in the composite PMI came from increased activity in the services sector.

Eurozone Manufacturing Contracts

Eurozone Manufacturing PMI
Eurozone Manufacturing PMI (February). Source: IHS Markit

Manufacturing activity in the eurozone reversed course for the first time in 5 years. This comes as trade war concerns, global growth slowdown, and Brexit remain the largest risks to growth in the eurozone.

Data from IHS Markit covering the manufacturing activity for February showed a downbeat report signaling a slowdown in Germany. Europe’s largest economy seemed to drag down the growth for the entire economic bloc.

The slowdown comes as ECB officials weigh the prospects of relaunching further easing measures to shore up stimulus. It comes just under two months after the central bank ended its 2.6 trillion euro quantitative easing stimulus program.

IHS Markit’s February manufacturing PMI report released just under two weeks ago showed that activity fell to 49.3 in February. This is in comparison to January’s reading of 50.5. A result above 50 on the PMI indicates expansion in the sector.

With February’s PMI activity falling to 49.3, it signaled that the eurozone’s manufacturing activity was contracting.

Earlier, data from Germany showed that factory growth had contracted for the second consecutive month. Meanwhile, activity in other major economies such as France and Spain showed that activity slowed. Spain’s manufacturing sector fell below the 50-level for the first time in nearly five years.

Chris Williamson, the chief business economist for IHS Markit, claimed the manufacturing sector in the eurozone was at its steepest decline in nearly six years. He explained that forward-looking indicators suggest that there could be further downside risks as the economy moves into the second quarter of the year.

Data revealed that the new orders index also fell at the fastest pace in six years. This is while a backlog of works was being completed. Purchase of raw materials remained weak and so did hiring as a result.

Given the downbeat data, optimism hit the lowest levels since IHS Markit started keeping records in July 2012. The future output index fell from January’s 57.4 to 56.7 in February.

Williamson said:

“In addition to widespread trade war worries, often linked to U.S. tariffs, and concerns regarding the outlook for the global economy, companies report that heightened political uncertainty, including Brexit, is hitting demand and driving increased risk aversion.”

Eurozone Services PMI Rebounds

Eurozone Services PMI
Eurozone Services PMI (February). Source: IHS Markit

Activity in the services sector rose to a three month high in February. The increase came amid a broad recovery across the various member states. This was on account of improved demand and gains in employment.

Data from IHS Markit shows that the eurozone’s services PMI increased to 52.8 in February. This was up from January’s 51.2. The data also beat the preliminary estimates which forecast a modest increase to 52.3.

Growth in new orders in the services sector put pressures on capacity and employment. As a result, there was an increased demand for labor. This also saw wages turning higher in some cases according to the firms that participated in the survey.

Output costs also increased in order to protect margins. And, as a result, business confidence rose to a four-month high. Almost all major economies in the eurozone registered a solid increase in the services sector. In fact, Spain was the only exception.

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