Eurozone PMIs show economy stabilising while price pressures recede

The details of the report show that the decline in the manufacturing PMI was primarily due to a further shortening of suppliers’ delivery times after the Red Sea related disruptions in January and February (which has a downward impact on the index). On a more positive note, the new orders component of the manufacturing PMI as well as the new export orders component increased in March, although they remained below the 50 mark. With that said, a decline in the employment index also weighed on the manufacturing PMI, and this is consistent with our view that labour market conditions will continue to deteriorate even as the broader economy recovers. In terms of economic activity, the details of the report are in line with our expectations of further bottoming out in the eurozone manufacturing sector as output and forward looking components such as new orders and new export orders are increasing further but still in contractionary territory.

The services sector has moved further into expansionary territory after only just moving above the neutral mark in February. The rise in March was driven by both new business and positive expectations about future activity. Details on output prices and employment in the services sector declined. The picture of an expanding services sector fits the overall narrative in the eurozone economy of falling inflation and rising (real) wages boosting household purchasing power and private consumption as a result.

The ECB will be pleased with the data from two angles. First, the report suggests the economy is stabilising and the manufacturing sector is bottoming out. Secondly, there were positive signs for inflation. Manufacturing and services sector selling price expectations both declined, pointing to a decline in pipeline pressures for goods and services inflation. Furthermore the PMI hints at declining employment in the economy and particularly so in the services sector. The long anticipated deterioration in the labour market would fit our view of wage pressures abating further in the coming months.

All in all, the PMI is consistent with our base scenario for the eurozone economy, of GDP roughly stagnating in the first quarter. Meanwhile, the pickup in forward-looking expectations components suggests GDP growth will pick up in the second quarter, but probably remains below the trend rate (we have pencilled in 0.2% qoq for Q2).

Country reports show more weakness in core countries than peripherals

PMIs for France and Germany published this morning were weaker than the overall picture painted by the eurozone PMI, indicating more strength in peripheral countries. In France the composite PMI showed a sharper decline in economic activity compared to February (47.7 versus 48.1). This was contrary to consensus expectations which were for a further stabilisation of activity. This decline was primarily driven by a struggling manufacturing sector and to a lesser extent by the services sector.

In Germany the divergence between activity in services and manufacturing increased further. The manufacturing sector slipped further into contractionary territory whereas the services sector edged higher, almost at the neutral mark of 50 indicating a stabilisation in economic activity. As a result the composite PMI increased compared to February and still beat consensus expectations, despite this underlying divergence.