Eurozone PMIs show economy moving above neutral mark at start of Q2
Euro Macro - The eurozone composite PMI for April beat expectations and rose further into expansionary territory (at 51.4, up from 50.3 in March). Today’s reading and the upwardly revised March figure indicate the bloc’s economic activity is slowly increasing moving into the second quarter, which is consistent with our expectation for GDP to roughly stagnate in Q1 with a pick-up of growth in Q2.
Similar to last month the rise in the composite PMI was driven by an increase in the services PMI (to 52.9, up from 51.5), with the manufacturing PMI actually falling (to 45.6, from 46.1). Furthermore an increase in the composite job component indicates labour demand in the eurozone has edged up in April.
The details of the report show that the decline in the manufacturing PMI was partly due to a fall in new orders, possibly reflecting increased uncertainty caused by the conflict in the Middle East. Indeed, increased uncertainty together with higher oil prices might have also caused the output price component to increase in April. On the other hand, the headline PMI continues to be downwardly distorted by falling delivery times, as the impact of the Red Sea disturbances unwinds. Indeed, big picture, the details of the report are in line with our expectations for a slow bottoming out in the eurozone manufacturing sector, though structural headwinds are likely to prevent a strong recovery in 2024.
The services sector in contrast moved further into expansionary territory. The rise in April was broad-based and driven by new business expectations, output prices and job expectations. The details of the report, particularly on prices hint at sticky services inflation. Indeed, input and output price, which have been at high levels already, increased further in April. The picture of an expanding services sector fits the overall narrative in the eurozone economy of falling inflation and rising (real) wages boosting household purchasing power and private consumption as a result.
All in all, the rise in the composite PMI is consistent with our base scenario for the eurozone economy to resume growth in Q2, following a further stagnation in Q1. With that said, growth will probably remain below the trend rate (we currently expect 0.2% qoq for Q2).
Services sector drive French and German PMIs close to expansionary territory
Looking at the major national indices, the April composite PMIs for France and Germany both increased compared to March but were weaker than the eurozone PMI, suggesting that the periphery continues to outperform. Similar to the eurozone aggregate the increases in both countries were driven by the services sector with the manufacturing PMIs staying deep in contractionary territory.
In France, the composite PMI beat expectations and came in close to the neutral 50 mark (49.9 versus 48.3 in March). The manufacturing PMI declined compared to the March reading (44.9 versus 46.2 in March) while the consensus expected a small increase.
In Germany the divergence between activity in services and manufacturing increased even further. The manufacturing PMI stabilised but stayed deep in contractionary territory whereas services sector activity is now clearly expanding (53.3 versus 50.5 in March). Despite this underlying divergence, the German composite PMI rose above the neutral mark for the first time since June 2023. (Jan-Paul van de Kerke)