Key indicators for January:
Flash Eurozone Composite Output PMI(1) at 52.7 (53.3 in Dec), 31-month low
Flash Eurozone Services Activity Index(2) at 52.0 (53.1 in Dec), 53-month low
Flash Eurozone Manufacturing PMI(3) at 52.6 (52.6 in Dec)
Flash Eurozone Manufacturing Output Index(4) at 53.9 (53.5 in Dec)
|Source: NTC Economics|
Provisional survey findings for January:
The RBS/NTC Flash Eurozone Composite Output Index, based on around 85% of normal monthly survey replies, hit a 31-month low of 52.7 in January, dropping from 53.3 in December to signal an easing in the rate of growth for the third month running. The slowdown was driven by the service sector, where the rate of growth slipped to the weakest since August 2003. In manufacturing, output growth picked up slightly on the modest pace seen in December, but also continued to run well below rates seen last summer.
Slower growth of output was largely linked to a weakening of new order growth, which slowed to near-stagnation, posting the weakest monthly rise for just over three years. Only a very marginal increase in new business was recorded in services, registering the weakest gain since new business began rising four-and-a-half years ago. A slightly better performance was seen in manufacturing, though even here the rate of increase slowed to show only very modest growth of new orders and the second-weakest monthly increase for just over two-and a-half years. Within manufacturing, new export order growth slowed, registering the second weakest in the past 32 months.
Backlogs of work showed no change in January, bringing a halt to the continuous growth seen over the previous 28 months. The absence of any growth in backlogs reflected the need for companies to maintain current production levels in line with the slower growth of incoming new business and contrasts with the recent peak of growth in backlogs recorded last June.
Backlogs in the service sector fell, albeit only marginally, for the first time since August 2005, and showed only a very marginal rise in manufacturing.
Employment continued to increase, but the latest rise was the weakest for over a year as the rate of increase eased for the sixth consecutive month. Growth of service sector employment remained unchanged on December’s eight-month low, while manufacturing employment showed the second weakest rise in the past 17 months.
Input price inflation remained steep in January, with the rate of increase rising to the highest since August 2006. A slight easing in the rate of inflation in services for the second successive month from November’s seven-year high contrasted with a marked acceleration in manufacturing, where the rate of inflation was the sharpest since last July. In both sectors the rates of increase were above the averages recorded throughout last year.
Output prices continued to rise as firms passed higher costs on to customers, although the rate of inflation eased marginally to a three-month low and therefore continued to run below the average recorded last year. A moderation in output price inflation in services contrasted with an acceleration in manufacturing, which saw the strongest rise since last March.
Commenting on the flash PMI data, RBS Head of Euro Area Economics, Jacques Cailloux said: “The composite PMI (Purchasing Managers' Index) remains consistent with expansion in the euro area economy, albeit at a pace below trend. The broad stagnation in measures of new business and backlogs, however, suggests that there is very little forward-looking momentum in the economy at this stage, with increasing risks that the economy could be at a standstill by the middle of the year. The lack of further increases in the prices charged index meanwhile suggests that signs of second round effects remain scant. Our expectation therefore remains that the extent of the slowdown in the economy will eventually force the ECB’s hand to lower its key interest rates in Q2. A further loss of confidence in the financial market could prompt an earlier cut.”
|Source: NTC Economics|
The Purchasing Managers’ Index (PMI) survey methodology has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries (including the European Central Bank) use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.
1. The Composite Output PMI is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.
2. The Services Business Activity Index is the direct equivalent of the Manufacturing Output Index, based on the survey question “Is the level of business activity at your company higher, the same or lower than one month ago?”
3. The Manufacturing PMI is a composite index based on a weighted combination of the following five survey variables (weights shown in brackets): new orders (0.3); output (0.25); employment (0.2); suppliers’ delivery times (0.15); stocks of materials purchased (0.1). The delivery times index is inverted.
4. 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?”