Eurozone economy picks up in February despite weakness in manufacturing

LONDON (ICIS)–Manufacturing continued to hamper the recovery of the eurozone economy in February, according to IHS Markit on Friday.

The flash composite Purchasing Managers’ Index (PMI) – accounting for both the services and manufacturing sectors – rose to 51.6 points in February from 51.3 the previous month.

While this signifies the largest monthly increase in business activity since last August, manufacturing remained universally below the 50.0 neutral-mark – a reading below shows economic contraction.

The flash eurozone manufacturing PMI jumped to 49.1 in February, up from 47.9 in January, the strongest reading in 12 months, while the flash eurozone manufacturing PMI output index edged up to 48.4 from 48.0 in January, marking an eight-month high.

Weakness was attributed to limited new business growth, with new orders in manufacturing declining for the seventeenth successive month, although this was the smallest drop for 15 months as domestic demand helped counter a subdued export market.

Despite the declines recorded in manufacturing, new orders fell at the slowest rate since late 2018, which could signal some encouragement for the eurozone economy.

The average prices charged for goods dropped at the fastest rate in almost four years, as inflationary pressures drove down factory costs and charges.

The EU’s statistical agency Eurostat announced on Friday that eurozone annual inflation stood at 1.4% in January, up from 1.3% in December, with EU-wide inflation up 1.7% from 1.6% the previous month.

Longer delivery times exacerbated conditions in manufacturing, as the outbreak of the coronavirus has disrupted trade flows of material.

UNCERTAIN OUTLOOK
“The outlook remains highly uncertain, notably in respect to the potential for further disruptions to supply chains, travel, tourism and demand arising from the coronavirus outbreak,” said Markit’s chief economist Chris Williamson.

“In particular, the widespread delivery delays seen in February bode ill for production in March unless new deliveries can be secured.”

The increase in the composite PMI should abate concerns of an imminent recession in Europe, according to research group Oxford Economics, predicting 0.1% GDP growth for the eurozone in Q1.

There are concerns that the impact of the coronavirus has yet to be fully recognised in the European market, however.

“The most eye-catching data point was the jump in the German manufacturing PMI. But there was weakness beneath the surface as nearly half of the rise was due to a lengthening in supplier delivery times, which was ascribed to disruptions in China,” said Oxford Economics.

“But the fragility of global supply chains means that even small disruptions in China could spell large repercussions for Europe down the line. In that sense, the PMIs are a welcome sign of resilience – but they provide a false sense of security.”

The slowdown due to the coronavirus outbreak could have a more pronounced impact, according to analysts at investment bank Credit Suisse on Friday, who argued that recovery on the Chinese market could be pushed back until the second half of the year for the manufacturing and construction sectors.

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Front page picture: The River Rhine in Germany; manufacturing activity picked up in the country in January
Source: Stefan Ziese/imageBROKER/Shutterstock