Source: Markit Economics

The Markit Flash Eurozone Composite Output Index, based on around 85% of normal monthly PMI (Purchasing Managers' Index) survey replies from the manufacturing and services sectors, rose from 44.6 in June to 46.8 in July. The latest report, released this morning, signalled an easing in the rate of decline for the fifth successive month and the smallest monthly drop in output for ten months. The easing was driven largely by a marked slowing in the rate of contraction of manufacturing output.

Production fell only slightly to register the weakest decline for 13 months. Manufacturing consequently saw a weaker rate of decline than services, in contrast to previous months, with business activity in the latter showing only a slight easing in the rate of decline compared to June. Services nonetheless posted the smallest decline for nine months.

New orders fell at the slowest pace for 11 months as the rate of decline eased for the fifth consecutive month. A marginal fall in manufacturing new orders – the weakest decline for 16 months – contrasted with a continued marked rate of loss of new business in the services sector, which saw only a modest slowing in the rate of decline to the weakest for ten months. Manufacturers' new export orders again fell at a faster rate than total new orders, though showed the smallest fall for 13 months.

Manufacturers' stocks of finished goods continued to fall at a near-record rate in July, unchanged on June's steep pace. With stocks falling sharply but new orders showing signs of stabilizing, the ratio of new orders to inventories rose to a two-and-a half year high. Increases in this ratio tend to be followed by upturns in production.

The outlook for services also remained far brighter than seen earlier in the year, but fell back slightly from the 23-month high seen in June.

Improved prospects led to a moderation in the rate of job losses for the third month running from April's record. Although remaining higher than ever seen in the survey's history prior to the recent downturn, payroll cuts were the lowest for six months in July. Companies have now reduced their headcounts for 13 consecutive months, with manufacturers continuing to report a far steeper rate of decline than services.

Input prices fell for the ninth successive month, dropping at a slightly sharper rate than in June. A faster rate of decline in services – linked in part to lower wage pressures – offset a slowing in the rate of decline of manufacturers' raw material prices.

The rate of decline of output prices meanwhile slowed for the fourth straight month, registering the smallest fall for six months. Rates of decline slowed in both manufacturing and services. However, the rate at which output prices fell remained steep by historical standards of the survey, as discounting to stimulate sales remained widespread.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: “The flash PMIs are consistent with Eurozone GDP continuing to contract as we move into Q3, though the quarterly rate of decline looks set to have eased again from 0.5-0.6% in Q2 to approximately 0.3% in July. While this is a further welcome step on the road to recovery, the PMI data suggest that the Eurozone continues to lag the United States and United Kingdom, where returns to growth are already evident. It is also a concern that the speed of the downturn in the euro area has only been arrested by the use of widespread discounting, as firms forsake profits to drive sales. ”