By: Miles Pearson – Forex Focus
Growth in the factory and services sectors slips month-on-month, but remains above 50.
The IHS Markit Eurozone Manufacturing PMI (Purchasing Managers’ Index) came in at 56.2 for April, below the 56.6 reported in March and higher than the flash estimate reading at 56. Factory activity in the eurozone slowed to its lowest level in 13 months on the back of a slowdown in exports, new orders and employment, offsetting the month-on-month gains in output. Likewise, new export orders slipped to 17-month lows as the euro extended gains versus the greenback, leading to a multi-month fall in the intake of new work.
Job growth in the manufacturing sector rose for the 44thmonth in a row, although the rate of increase skid to its lowest level since August of last year, with only France and Austria reporting stronger job growth in April compared to the previous month. On the inflation front, input price inflation eased to eight-month lows in spite of higher commodity prices and supply-side constraints. Output prices, on the other hand, edged higher after slipping to three-month lows in March, as manufacturers passed on part of the rise in purchase prices to consumers.
About the Eurozone Manufacturing PMI data
The PMI data is a survey of 3,000 manufacturing firms, covering eight countries that account for about 90 percent of the total manufacturing activity in the eurozone. Based on the outcome of the survey, factory activity registered month-on-month growth in France and Ireland, with the pace of expansion unchanged in Austria—while growth slowed in Germany, Italy, Netherlands, Spain and Greece during a similar period. The top three countries reporting the largest PMI numbers in the eurozone were Netherlands, Germany and Austria with the country-wise PMI at 60.7, 58.1 and 58.0 respectively.
Outlook for the sector
The outlook for the manufacturing sector in the eurozone remained positive, although sentiment slipped to 16-month lows in April, with Germany and Greece being the only two countries in which sentiment seemed to have improved to a certain extent.
According to Chris Williamson, chief business economist at IHS Markit, “Although growth has slowed markedly compared to the start of the year, December had seen the best performance in over 20 years of survey data collection, with factory activity clearly surging at an unsustainable rate. Since then, supply constraints including raw material scarcities, supplier delivery delays and skill shortages have constrained production. Some of these adverse factors are therefore likely to be reversed in coming months, as capacity is increased, supply improves and factors such as strikes and weather cause fewer problems. However, anecdotal evidence from the surveys also highlights how demand has been curbed by other issues such as the stronger euro and rising prices. Uncertainty has also intensified due to worries regarding trade wars and Brexit, underscoring downside risks to the outlook.”
Business activity in the services sector
The IHS Markit Eurozone Services PMI slipped for the third month in a row in April, with the business-activity index falling to an eight-month low of 54.7, down from 55.0 reported in the flash estimates and below the 54.9 registered in March of this year. The index, however, remained above the long-run average of 53.2. With the exception of France and Ireland registering strong numbers, business activity slowed in the remaining three countries as new orders and output growth eased, led by Germany, with the slowest rate in 19 months. A decline in output growth also resulted in work backlogs, which rose for the 23rd month in a row, compelling companies to hire additional workers, thereby pushing up the employment rate at its fastest pace since October 2007.
On the price front, input price inflation rose for the first time since January of this year, while output costs increased at the slowest pace since September of last year.
About the Eurozone Services PMI data
The Eurozone Services PMI data is based on a survey of around 2,000 private-sector firms from countries that include Germany, France, Italy, Spain and the Republic of Ireland. The index tracks key information related to sales, employment, inventories and prices in the sector.
Outlook for the sector
Businesses remained upbeat, although sentiment slipped to the lowest level since December of last year. While confidence improved in Spain and Ireland, business sentiment lagged in Germany and Italy, with business optimism unchanged in France.
Commenting on the business activity numbers, Chris Williamson, chief business economist at IHS Markit, said: “The final PMI numbers confirm the marked, broad based fading of the Eurozone’s growth spurt so far this year. The headline index has fallen from an 11½-year peak in January to a 15-month low in April. While the expansion signalled by April’s PMI is disappointing relative to the elevated levels seen at the start of the year, the survey remains indicative of the Eurozone economy growing at a robust quarterly rate of approximately 0.5-0.6 percent. Employment growth is also still booming, with the rate of job creation in the service sector at its highest for over a decade. Employment is a lagging indicator, however, and two reliable leading indicators have turned down, suggesting that both output and hiring trends will weaken further, at least into May.”
The European Central Bank (ECB) left key interest rates on hold following its monetary-policy meeting late last month, maintaining a dovish tone and linking the future of interest rates in the eurozone to a sustained return of inflation in the region to around 2 percent. The central bank also maintained its net asset purchase of €30 billion per month, which is expected to run until the end of September of this year.
However, with the Eurozone PMI data both in the manufacturing and the services sectors moderating in the last three months, the possibility of non-standard monetary-policy measures extending beyond the September deadline may not really surprise markets anymore.