Source: Markit Economics

The Markit Flash Eurozone Composite Output Index for February, based on around 85% of normal monthly survey replies, was unchanged on January’s level of 53.7, indicating an increase in private sector output for the seventh consecutive month. Manufacturing output rose for the seventh month running, with the rate of growth accelerating to the fastest since April 2007, offsetting the sluggish services sector.

The rate of increase in the PMI (Purchasing Manager' Index) remained slightly weaker than December’s peak, but continued to run at a pace not seen since late-2007. New orders also rose at an identical pace to January, which had seen the strongest gain since November 2007.

Conditions varied considerably by sector, however, with manufacturing output surging higher while growth slowed in the service sector. Manufacturing output rose for the seventh month running, with the rate of growth accelerating to the fastest since April 2007. Manufacturing new orders and new export orders both increased at the fastest rates since February 2007. Firms reported improved demand arising from the weak Euro, which has fallen to its lowest level against the US$ for almost nine months, as well as ongoing recoveries in demand in key export markets and the rebuilding of inventories by customers (the amount of goods purchased by producers rose at the fastest rate since July 2007 and the new orders-to-inventory ratio remained close to a ten-year high).

In contrast, service sector activity expanded only modestly in February, having less exposure than manufacturing to the stimulus created by rising international trade and the inventory cycle. Services activity increased for the sixth month in a row but the rate of growth slowed for a second month running, following a similar trend in growth of incoming new business. Expectations for the year ahead in the service sector nonetheless remained buoyant, but down slightly from January.

Employment fell at the weakest pace since September 2008, the rate of job losses continuing the easing trend that has been evident over the past year. Furthermore, in a sign that job losses may slow further in coming months, backlogs of work rose for the third month running in February.

The pace of manufacturing job losses slowed particularly sharply, though manufacturers continued to see a steeper rate of decline than services. Both sectors saw employment post the smallest declines since late-2008.

With manufacturers restocking, suppliers’ delivery times lengthened to the greatest extent since December 2006, helping drive a further acceleration in input price inflation to the highest since September 2008. Input prices in the service sector rose only marginally, in contrast, largely limited by weak upward pressure on staff pay rates. Measured across both sectors, input price inflation accelerated for the fourth successive month to the highest since October 2008.

Prices charged fell again, reflecting the fragility of demand, although the decline was the weakest since November 2008. Rates of decline eased in both manufacturing and services, with the latter again reporting the steeper drop.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit Economics said: “A surge in growth of manufacturing, driven by rising exports and inventory rebuilding, offset a worrying slowdown in the already meagre rate of expansion seen in the service sector. So while the recovery continued, consistent with GDP rising by approximately 0.4% in Q1 so far, it was unbalanced and concerns persist about its sustainability. Inflationary pressures are meanwhile gathering in manufacturing supply chains, as shortages of key inputs are allowing suppliers to hike prices. ”

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 4,500 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.