Eurozone economy shakes off Omicron

Jump in PMI signals post-Omicron growth rebound and mixed news on price pressures

The eurozone composite PMI jumped higher in February. It rose to 55.8, up from 52.3 in January, beating our above consensus forecast. The index has returned to its highest level since September 2021. The rise in the composite PMI was totally due to a jump in the services sector PMI (up by 4.7 points to 55.8) as a result of the unwinding of social distancing measures and restrictions related to Omicron. In contrast, the manufacturing index edged lower by 0.3 point to 58.4, at which level it still is consistent with robust expansion in the sector. The composite PMI tends to track GDP growth relatively well in normal cyclical growth episodes, but has failed to capture the big jumps economic activity due to lockdown measures and other restrictions during the pandemic. Having said that, the jump in the composite PMI signals a sharp rebound in GDP growth following a soft patch that started in the final months of 2021 and persisted moving into 2022. We have pencilled in modest growth in Q1 (comparable to the 0.3% qoq of 2021Q4) and a rebound to around 1% qoq in Q2.

The details of the PMI report provided some interesting insights. To begin with, the decline in the EZ manufacturing PMI in February was due to an improvement in the component that measures the suppliers’ delivery times, which has a negative sign in the index. For instance, in Germany the component measuring the suppliers’ delivery times in the manufacturing PMI improved by 7 points, suggesting that supply bottlenecks, although still present, are gradually becoming less severe. The same story holds for the input price index in eurozone manufacturing, which still is at a historically high level but declined by almost 2 points in February, implying prices are still rising, but at a slower pace. The output price index in manufacturing edged lower as well in February, suggesting that some of the price pressures in industry are gradually easing. Indeed, we expect them to recede significantly later in the year. In contrast, the input and output price indices in the services sector each increased in February, in line with the unwinding of containments measures and re-opening in large parts of the sector. We think that the normalisation of services sector activity and prices will keep core inflation in the eurozone elevated in the first half of this year, but that services inflation will gradually decline from around the middle of this year onwards.