Source: Markit Economics

The Eurozone recovery continued in January but output growth slowed. The Markit Flash Eurozone Composite Output Index, based on around 85% of normal monthly survey replies, registered 53.6 in January, indicating an increase in private sector output for the sixth successive month. The index fell for the first time since bottoming out in February of last year, down from 54.2 in December, signalling a modest easing in the rate of expansion.

Manufacturing again led the upturn. Production of goods increased for the sixth month running, with the rate of growth accelerating to the fastest since August 2007. Service sector activity also continued to expand, up for the fifth month in a row, but the rate of increase slowed for the first time over this period. Expectations for the year ahead in the service sector nevertheless picked up, posting the second-strongest reading for four years.

New orders rose for the fifth successive month, increasing by only slightly less than December’s 25-month peak. Manufacturers reported the largest increase in new orders since July 2007, with new export orders rising at a pace unchanged on December’s 27-month high. Service sector new business rose for the fifth month running, but a modest slowing in the rate of growth meant expansion lagged further behind that seen in manufacturing.

Employment fell for the nineteenth straight month, although the rate of job losses eased to the weakest since October 2008. The slowing in the rate of decline was linked to rising new orders and resulting pressure on operating capacity; backlogs of work rose, albeit modestly, for the second month running and at the strongest pace since November 2007.

Manufacturing continued to report a steeper pace of job shedding than services, and even saw an increased rate of decline as firms sought further productivity gains. In contrast, the rate of decline slowed in services to show the second-smallest drop in just over a year.

Inventory levels continued to fall in manufacturing but at slower rates than in December: stocks of finished goods showed the smallest fall since March of last year, while stocks of purchases posted the weakest decline since October 2008. The ratio of manufacturing new orders to finished goods inventories remained elevated nonetheless, close to the near 10-year highs seen late last year and suggesting further output growth in coming months.

Manufacturers’ purchasing of inputs showed the largest monthly rise for two years, causing delivery times to lengthen for the sixth month running. Producers’ input prices rose at the fastest pace since September 2008, in line with this increase in demand. Service sector costs meanwhile showed the largest rise since November 2008, often linked to higher fuel costs. Measured overall, input price inflation rose to the highest since October 2008.

Prices charged continued to fall, however, as discounting to boost sales remained widespread. The fall in charges was identical to that seen in December, although far weaker than the pace seen a year ago. Charges fell in both manufacturing and services, with the latter seeing the steeper drop.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: “The Eurozone started 2010 with signs of continued economic recovery. A slight easing in the rate of growth needs to be put in the context of the adverse weather that affected many businesses during the month. The rate of growth was also in line with the average seen in the final three months of last year, which was the strongest quarter for two years. Most encouragingly, the rate of job losses was the weakest for fifteen months.”

The Eurozone PMI (Purchasing Managers' Index) is produced by Markit Economics and is based on original survey data collected from a representative panel of around 4500 companies based in the euro area manufacturing and service sectors. The flash estimate is typically based on approximately 85-90% of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data.