Eurozone PMIs give mixed signal but not inconsistent with cooling economy

The flash estimates of the eurozone PMIs for April show a mixed picture. Whereas the manufacturing PMI dropped sharply lower and moved further into contraction territory (to 45.5 in April, down from 47.3 in March), the services PMI increased and jumped further into expansion territory (to 56.6 in April, up from 55.0 in March). The services PMI has never been this far above the manufacturing PMI since the start of the series in 1998. This seems to suggest that activity in services still is in the process of normalisation after the pandemic and that the normal cyclical drivers of the sector play a less dominant role at the moment. Also, the high level of the services PMI might be somewhat more sentiment driven than under normal circumstances as the link between activity in the sector and the level of the PMI has weakened in recent quarters. For instance in 2022Q3 and Q4 production in the services sector expanded by 0.8% qoq and 0.4% qoq, respectively, whereas the services PMI was in contraction territory (i.e. well below 50) during those two quarters.

We still think that the normal cyclical drivers will soon start to affect activity in the services sector. Indeed, the impact of past and upcoming interest rate hikes by the ECB has resulted in tightening bank lending standards, with a rising percentage of companies in the services sector reporting that financial circumstances are limiting the level of production. Moreover, recent Eurostat data shows that the number of bankruptcies in certain parts of services (transportation and storage, accommodation and food services, education health and social activities) has soared higher in 2022Q3 and Q4 and also is already well above the pre-pandemic levels. All in all we still expect GDP to contract modestly during most quarters this year. Indeed, Eurostat has recently revised growth in 2022Q4 lower to -0.1% qoq, down from 0.0% in its second estimate and +0.1% qoq in its first estimate, implying that the economy has already began contracting modestly in the final months of last year.