Eurozone PMIs send mixed signals
Euro Macro: PMIs rise on stronger services sector – The eurozone composite PMI increased to 52.3 in February, up from 50.3 in January. The rise was mainly due to higher activity in the services sector, with the Services PMI increasing to 53.0, up from 50.8.
The Manufacturing PMI declined to 48.5 in February, down from 48.8 in January. This decline in the manufacturing PMI was totally due to a shortening of supplier delivery times, which normally is a sign of cyclical weakness. The other parts of the manufacturing PMI were mixed. Although the manufacturing output component increased to 50.4 from 48.9, the new export orders component fell by 1.3 points to 43.2 and the total new orders component remained well below the boom-bust level of 50 as well (at 46.6 in February), suggesting that the sector will contract in the coming months.
Despite the rise in the composite PMI in February, we still think it is likely that GDP will contract modestly in the coming quarters, as the impact of past and upcoming rate hikes by central banks will hit the economy. Indeed, the ECB’s report Main findings from the ECB’s recent contacts with non-financial companies published on 16 February, showed that ‘most industrial sector contacts reported declining activity’. Also the non-financial companies reported that the ‘short-term outlook for activity remained subdued’ and that there was ‘increased caution with respect to hiring intensions and an easing of some labour shortages’. Moreover, ‘employment agencies observed lower demand for temporary staff’, which also signals that labour market conditions are gradually deteriorating on the back of the economic slowdown. Combined with higher interest rates and a deteriorating housing market, these worsening labour market prospects should reduce private consumption. This would also be in line with the current level of consumer confidence. Consumer confidence improved slightly in February (up to -19, from -20.7 in January) but stayed well below its long-term average value. Also the propensity to do major purchases stood at -45.8 in January, which is very close to the lowest point during the pandemic of -47.7. All told, we still expect modest contraction in GDP during most of 2023, but the risks to this forecast are tilted to the upside.