Eurozone PMIs signal ongoing economic weakness, yet slower disinflation
The eurozone composite PMI for January came in close to the consensus and our own expectation (at 47.9, up from 47.6 in December). The rise in the composite PMI was entirely due to an increase in the manufacturing PMI (to 46.6, up from 44.4), with the services PMI declining (to 48.4, from 48.8). The details of the report indicate that the pace of contraction in manufacturing is slowing, with the new orders component of the manufacturing PMI rising by 2.5 points to 44.6. Also, the forward looking new business component of the services PMI increased in January (by 0.8 points to 47.9). All in all the January PMI signal that the pace of contraction in GDP is slowing down moving into 2024. The flash estimate for 2023Q4 GDP will be published on 30 January. We have pencilled in -0.2% qoq. In our base case for the eurozone economy we see GDP roughly stabilising in 2024Q1, but based on hard economic data for October-November that was published in recent weeks, and on the outcome of the January PMI, we think that the risks to our forecasts are tilted toward a somewhat deeper and longer contraction in GDP.
Turning to the price components of the PMI, both the input and the output price component of the composite PMI increased in January. Although the input and output price components of the manufacturing PMI hardly changed in January and remained well below the 50-level that separates a rise in prices from a fall in prices, the input price component of the services PMI increased by 1.3 points to 62.8 and the output price component of the services PMI increased by 0.6 points to 56.2. As services prices are the most domestically driven part of inflation and wage growth has a relative big impact on services prices, we think that the rise in these price components of the PMI supports the view of the ECB Governing Council that it is too early to declare victory in their fight against inflation. Our base scenario is that the ECB will cut interest rates by 25bp in June.
