economy europe Markets

Euro-Area PMIs Are Rorschach Test In January

No recession, but don't bet on a "V-shaped" recovery.

Green shoots.

That will be one of the generic, headline-friendly interpretations. Or maybe not so much, because at least one mainstream outlet is spinning today’s flash PMIs out of Europe as just more evidence of stagnation.

You can craft your own spin, but note that flash reads on manufacturing PMIs for Germany and the euro-area as a whole printed generally ahead of expectations Friday, rekindling hopes that the factory slump which has plagued the bloc for more than a year is abating.

For Germany, January’s 45.2 flash read on IHS Markit’s manufacturing gauge is the best print in nearly a year. This month marks the 13th consecutive month in contraction – that is, Germany’s factory slump is now in its second year. New orders rose to 48. Consensus was looking for 44.5 on the headline so this is a solid beat.

The services gauge for Germany came in at 54.2, well ahead of the 53 the market was looking for and above the most optimistic estimate.

Markit called the numbers “a welcome, albeit modest, upturn in business activity across Germany’s private sector”.

“A number of positive takeaways from January’s flash PMI survey suggest the storm clouds over the German economy may be starting to clear”, Phil Smith, Principal Economist at IHS Markit said. “The drag from the downturn in manufacturing continues to ease as the sector moves closer to stabilisation, while the services economy is back growing at a robust pace”.

This is welcome news. Last week, Germany’s statistics office said that according to preliminary calculations, GDP grew just 0.6% in 2019, the slowest in six years.

For the euro-area as a whole, Friday’s numbers were mixed. The services PMI disappointed in France, even as the manufacturing gauge beat. Broadly, the euro-area composite PMI printed 50.9, versus an expected 51.2.

“The eurozone economy failed to pick up growth momentum at the start of 2020”, IHS Markit sighed. “Business activity increased at the same slight pace as was seen in the final month of 2019 as the rate of expansion in new orders remained muted”.

Still, the manufacturing gauge came in at 47.8. That’s the 12th straight month of contraction (i.e., the euro-area manufacturing slump is now a year old), but it’s also the best read since April, and beat even the highest estimate from nearly four-dozen economists.

“The failure of growth to accelerate was in spite of some areas of positivity”, Andrew Harker, Associate Director at IHS Markit remarked. “The service sector remained in expansion, while the worst of the manufacturing downturn looks to have passed and industry appears to be moving towards stabilization”.

Ultimately, this is something of a Rorschach test. The ECB will likely see a stable enough backdrop to support the wait-and-see approach communicated by Christine Lagarde on Thursday. The Governing Council will be crossing its fingers that things don’t take another turn for the worse while the strategy review is ongoing.

“With manufacturing showing early signs of recovery and the service sector continuing to grow, chances of a recession are receding further”, ING said Friday, before cautioning that “while expectations of a swift recovery may be increasing now, chances of a V-shaped are slim”.


 

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