Eurozone returns to growth as manufacturing hits record highs, service improves

Author: Jonathan Lopez


LONDON (ICIS)--The eurozone economy returned to growth in March as the rally in manufacturing activity continued, hitting record highs, while services improved after lockdowns hit consumer-facing sectors the hardest, analysts at IHS Markit said on Wednesday.

Manufacturing activity stood at 62.4 points in March, showing the boom that registered in the fourth quarter carried over into the first quarter as well.

Markit’s PMI index had never recorded such a high reading for manufacturing in the eurozone, which it has compiled since the now 19-country currency union was set up in 1997; the euro become a currency in circulation in 2002.

Eurozone flash PMI indices
(below 50.0 points = contraction)
March February
Composite (services + manufacturing) 52.5 48.8
Services 48.8 45.7
Manufacturing output (1) 63.0 57.6
Manufacturing (2) 62.4 57.9

The boom in manufacturing activity was due to the continued recovery of global trade in goods post-pandemic, said Markit, but concerns started to be noted among eurozone companies during the days on which the March survey was being compiled.

Rising infection rates and the slow roll-out of the vaccination programme are set to slow recovery in the eurozone, with Germany’s growth prospects already having been lowered by the country’s respected ifo Institute.

“Hiring picked up as firms boosted capacity in line with fuller order books and optimism about the year ahead … March also saw firms’ costs rise at the fastest rate for a decade, pushing prices charged for both goods and services higher during the month,” said Markit.

The flash PMI indices published before the month ends mostly look at Germany and France, the two eurozone largest economies; the rally was broad-based in both economies, contributing to the overall eurozone gains.

The improvement in job creation was noted strongly in both Germany and France, which bodes well for a sustained and sustainable recovery as consumers will have reason to be more confident.

Markit said companies had responded to the accumulation of uncompleted orders with a second successive month of net hiring, with employment growing at the steepest pace since November 2019.

“Manufacturers saw headcounts rise at a rate not seen since August 2018 while a far more modest rate of job creation was seen in the service sector, although even here the rise was the largest since the onset of the pandemic,” it said.

“France reported the highest rate of job creation, with jobs growth at the steepest since October 2018, while Germany reported the largest payroll gain since June 2019.”

In the rest of the eurozone, Markit said job losses had moderated; more details will become available on 1 April, when the final March indices are due to publish.

A key variable for manufacturing companies is the prices at which they sell the products they manufacture. Without increases in those prices, investments like job creation or capital expenditure (capex) to expand their businesses become difficult.

According to the latest figures available from Eurostat, for January, chemicals producers’ selling prices stood at more than 2%, sharply higher than the 1.4% average industrial producer prices and more than doubling the inflation rate during that month.

“[In March] Goods prices rose especially markedly, posting the largest rise for almost 10 years, often linked to suppliers hiking prices amid record supply chain delays as shortages worsened,” said Markit on Wednesday.

Export orders rose particularly sharply, helped by a record rise in export-oriented Germany.

“[Export orders] rising at a pace rarely exceeded in the survey’s history due largely to an unprecedented increase in manufacturing … The upturn in order book inflows caused backlogs of work to rise for the first time in 28 months, growing especially sharply in Germany,” said Markit.

Despite the March surveys providing surprising upside, analysts at Oxford Economics maintained the forecast for GDP to shrink during the first quarter across the eurozone, also supported by the latest figures on infection rates.

The surveys by Markit were compiled on 12-23 March so the majority of the answers came in before Germany and France this week announced further lockdown measures to contain the pandemic, which are set to hit services sectors hard.

“[In Germany] The government announced yesterday that lockdown measures are to be extended until at least April 18 as plans to gradually unwind restrictions were delayed, so the immediate outlook for services is likely to worsen,” said Oxford Economics.

“[In France] The near-term outlook remains uncertain as the government has imposed a partial lockdown in Paris and northern France to combat a rise in coronavirus cases, which will weigh on near-term demand prospects.”

Therefore, despite better-than-expected readings in March, the analysts said they still expect the economy in the eurozone to contract by 0.5% in the first quarter.

“A higher starting point in March should also translate into stronger quarterly growth in Q2,” they concluded.

Despite the lockdown imposed to stop the spread of a more contagious coronavirus variant having endured most of Q1, in the UK growth also picked up in March.

In the flash PMIs published by IHS Markit and the UK's Chartered Institute of Procurement & Supply (CIPS), all indicators went over the 50 point mark, with the overall composite leaving negative territory, and the speed of recovery the fastest since August.

UK flash PMI indices
(below 50.0 points = contraction)
March February
Composite (services + manufacturing) 56.6 49.6
Services 56.8 49.5
Manufacturing output (1) 55.6 50.5
Manufacturing (2) 57.9 55.1

1. The Manufacturing Output Index is based on the survey question “Is the level of production/output at your company higher, the same or lower than one month ago?”

2. Manufacturing PMI is a composite index based on a weighted combination of new orders (0.3); output (0.25); employment (0.2); suppliers’ delivery times (0.15); stocks of materials purchased (0.1).