News & analysis

A marginal uptick in eurozone PMIs does little to dispel the notion that the bloc is well and truly stuck in contraction. Admittedly, January’s rate of activity slowdown was the lowest recorded in six months, with the composite reading printing at 47.9, though even this is little to brag about.

Activity indicators printed sub-50 across the board once again, recession looks assured and with no recovery in sight, concerns should be growing over how long and how severe any downturn could be. Demand conditions remained soft, as did employment, though this increased marginally in January. Arguably, the one notable exception to this trend of weak readings came from selling price inflation, where prices charged rose at the steepest rate since May 2023.

All told, this should keep the ECB hawkish for the time being, and the eurozone economy stuck in a rut, waiting for ongoing contraction to kill off any remaining inflation pressures.

The raft of soft eurozone readings contrasted unfavourably once again with UK figures, however, which continue to outperform expectations. A further rise in the composite reading, now well in expansionary territory at 52.5, highlights the divergent fortunes of the two economies, though this was accompanied by ongoing inflation pressures. Better UK growth and renewed inflation pressures in the eurozone have seen both sterling and the euro rise against the dollar following this morning’s publications, with GBPEUR also rising in response to the UK’s relative economic outperformance.

Looking through the eurozone releases in detail does little to change the grim picture painted by headline readings. The composite reading for France fell from 44.8 in December to 44.2 in January, with Germany similarly recording a decline from 47.4 to 47.1. January’s downshift was led by the services sector, which saw indicators cool to 45.0 and 47.6 in France and Germany respectively, down on the readings of 45.7 and 49.3 recorded for each the month prior. Indeed, manufacturing indicators actually climbed this month, though at 43.2 in France and 45.4 in Germany, this still marks a significant contraction in activity.

Risks to the growth outlook appear skewed to the downside as well. Granted, business confidence continued to tick up for the bloc as a whole. But new orders continued to slow, and firms continue to run down backlogs of existing work, suggesting that the current weakness in activity will persist as increasing numbers of firms exhaust their pipelines of work.

Despite the soft activity measures, this failed to translate cleanly into weakening employment conditions in January. Whilst France continued to record falls in employment, levels stabilised in Germany and increased for the eurozone as a whole. That said, we expect this is just a temporary respite, with a slowing economy still likely to weigh on the labour market over coming months. Indeed, this may well be necessary to see inflation pressures in the bloc killed off once and for all. While input costs for manufacturing firms continued to fall in January, services providers saw cost growth accelerating to the highest rate in eight months. These rises in input costs were matched by rises in selling prices too. In a worrying development for the ECB, selling price inflation has now risen for three successive months from October’s low, led by the services sector.

Whilst we ultimately expect the slowdown in activity to weigh on the labour market and kill off any remaining inflation pressures, with employment conditions seeing something of a respite for now, this is keeping price growth elevated despite the soft activity readings. This should see the ECB remain hawkish in the short term, but remains consistent with our base case for the ECB to deliver rate cuts from April.

In sharp contrast to their continental neighbours, UK PMI readings once again indicated an economy in expansion. Whilst the manufacturing sector continued to underperform, with a PMI reading of 47.3, growth in services activity saw the PMI reading land at 53.8, up from 53.4 in December. The uptick in growth indicators was accompanied by a modest rise in employment, though firms also pointed to signs of continued softening in the labour market, particularly in manufacturing. Notably, this meant that wage pressures once again saw a strong rise in input costs, particularly for services firms, which once again translated into increasing prices charged. That said, with these increasing at the slowest pace since October, it appears that the passthrough from wages to inflation may be softening, having appeared to pick up strongly over recent months. All together, the decent growth numbers should keep inflation risks skewed to the upside, and the BoE hawkish as a consequence.

Without the slowdown in activity seen elsewhere, there is less need for policymakers on Threadneedle street to pivot to rate cuts imminently, meaning we continue to look for four BoE rate cuts in 2024, beginning in the second half of the year.



Nick Rees, FX Market Analyst


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