Home Central Banks Eurozone Manufacturing PMI at 58.1, Services at 55.8 in September

Eurozone Manufacturing PMI at 58.1, Services at 55.8 in September

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Written By: Richard Koch – Forex Focus

Higher growth leading to inflationary pressures…will the European Central Bank announce tapering?

IHS Markit’s eurozone manufacturing PMI (Purchasing Managers’ Index) rose to 58.1 in September from 57.4 the previous month on the back of expansion in new orders and output across the eight major countries covered in the region. The September numbers, which recorded the highest growth in 79 months, came in slightly above analysts’ expectations of 57.6. The performance of the sector is derived from a survey comprising about 3,000 firms, with data collated from eight major countries that contribute about 90 percent of the overall manufacturing activity in the euro area: Germany, France, Italy, the Netherlands, Spain, Austria, Ireland and Greece; and the broader index is based on the performance of five individual indices comprising new orders, output, employment, suppliers’ delivery time and stock of items purchased.

According to Markit, manufacturing growth across the countries surveyed was broad-based, with activity in Greece rising to 111-month highs; while in Germany, the Netherlands and France, the index averaged at 78-month highs. Likewise, growth in the manufacturing sector remained unchanged in Italy, while it averaged near three-month lows in Ireland, Spain and Austria. The other major highlights of the September manufacturing PMI include:

  • Rise in manufacturing growth in France and Greece to the highest levels since April 2011 and June 2008 correspondingly.
  • Expansion in new orders to 76-month highs, leading to a rise in work backlogs.
  • Moderation in growth in new export orders, which remain near six-and-a-half-year highs.
  • Upsurge in job creation backed by strong output growth.
  • Employment levels at the highest since the start of the eurozone series in June 1997.
  • Capacity constraints leading to lags in vendor deliveries.
  • Demand for raw materials pushing input costs to five-month highs.
  • Upswing in output prices at the highest since April of this year.

A majority of the companies surveyed expect growth to remain robust over the next 12-month period, with the level of optimism rising to all-time records, beaten only in June of this year, as rising demand and improving economic conditions support economic growth. According to Chris Williamson, chief business economist at IHS Markit, “The euro-zone manufacturing boom kicked into an even higher gear in September, with the PMI rising to a level surpassed only once in the past 17 years. Optimism about the outlook has also improved, highlighting the increasingly positive mood among euro area producers. The stronger euro has so far barely dented export growth, and domestic demand conditions were generally seen to have improved. With the upturn being accompanied by rising inflationary pressures, expectations of an imminent announcement from the ECB in relation to tapering of policy stimulus will intensify.”

The release of IHS Markit’s services-sector PMI data on October 4 led to further confidence in the eurozone economy, as the sector expanded to a better than expected 55.8 in September from 54.7 of the previous month. The business-activity index representing the services sector in the eurozone came in above flash estimates of 55.6, registering the fastest growth in the last four months in addition to continuing in the expansion zone for the 50th month in a row. The index averaged 55.3 in the third quarter, moderately lower than the 56.0 reported in the second. Business activity was supported by:

  • Rise in new orders setting the quickest pace since March of this year.
  • Increase in new business activity, leading to a six-year record in work backlogs.
  • Uptick in job creation, as firms look to raise capacity to meet growing demand.
  • Surge in the rate of hiring, close to the peaks seen in the last 10 years.

In addition, all the economies covered by the survey in September registered growth in business activity, new orders, employment and work backlogs. Growth in new orders also led to rises in input costs, which were passed on to consumers, leading to the sharpest increase in output prices since March of this year. The exception was Italy, with output decelerating to the lowest since March, and output costs falling for the 74th month in a row.

According to Chris Williamson, chief business economist at IHS Markit, “The final September PMI numbers round off an impressive third quarter for which the surveys point to GDP rising 0.7 percent. The economy enters the fourth quarter with business energized by inflows of new orders growing at the fastest rate for over six years and expectations of future growth reviving after a summer lull. Growth is also becoming increasingly broad-based, which should help make the upturn more sustainable as corporate profits, labour markets and demand improve across the region. The euro-zone therefore looks increasingly able to withstand any political shocks and set for a strong end to the year. A rise in price pressures reflects the development of a sellers’ market for many goods and services as demand outstrips supply. As such, the survey suggests that deflationary forces have abated, fuelling confidence that reflationary pressures are becoming more engrained in the economy.”

The minutes of the European Central Bank’s monetary-policy meeting in September point to a wait-and-watch approach by policymakers as they assess the outlook for inflation and the economic impact of withdrawing stimulus by some of the other central banks. The minutes also highlighted the concerns of policymakers in relation to the rising euro and its implications on price stability in the medium-term. Markets can expect more clarity on the timing of policy decisions, especially with reference to tapering the stimulus package, that the monetary-policy committee is likely to announce following its meeting on October 26, 2017, in Frankfurt.

 

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