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News : EU Economy Last Updated: Jan 29, 2015 - 7:33 AM

Manufacturing and services activity rise in Eurozone at start of 2015
By Michael Hennigan, Finfacts founder and editor
Jan 23, 2015 - 3:25 PM

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Growth of business activity in the Eurozone economy accelerated to its fastest for five months in January. The Markit Eurozone PMI (purchasing managers' index) Composite Output Index rose from 51.4 in December to 52.2, according to the ‘flash’ estimate, which is based on around 85% of total survey replies.

The survey has now recorded an increase in the rate of economic expansion for two successive months, albeit with the rate of growth remaining only modest after having slowed to near-stagnation late last year (the latest reading remained below last year’s average of 52.7).

New orders also grew at the sharpest rate for five months as demand picked up at the start of the year, representing a further turnaround from the marginal decline seen back in November.

Backlogs of work meanwhile continued to fall in January, but the decline was only marginal and the smallest since last August.

Markit said that with outstanding business showing signs of stabilising rather than being depleted, and new orders rising, firms grew more confident in taking on extra staff. Employment growth picked up slightly to show the largest monthly rise since last July as a result, though the rate of job creation remained disappointingly weak overall.

The upturn was evenly spread across manufacturing and services, both sectors seeing jobs. However, in both sectors the rates of increase remained weak by historical standards, most notably for new orders in the goods-producing sector, where only a marginal increase was again recorded.

The recent slump in oil prices was meanwhile a major factor behind the first drop in companies’ input costs since May 2013, with average costs in fact showing the largest monthly fall since September 2009. The impact was most marked in manufacturing, where input costs fell at the sharpest rate since July 2009. Service sector costs were buoyed in part by some signs of rising wages and salaries, but nevertheless showed the smallest increase since February 2010.

Firms’ selling prices consequently fell at the fastest rate since February 2010 as lower costs were passed on to customers. Prices charged fell to the greatest extent since June 2013 in manufacturing, while the decline in services was the joint-fastest in five years.

The strongest upturn was again seen outside of France and Germany, where the surveyed countries collectively enjoyed the strongest rise in business activity since last July, with the pace of expansion reviving from December’s 13-month low. Growth accelerated in both manufacturing and services.

France fared particularly badly once again, with activity dropping for a ninth successive month and at a faster rate, albeit suffering only a marginal overall decline as a return to contraction in services was offset by a reduced rate of decline in manufacturing. More encouraging was the news on new orders, which showed the largest gain since March of last year, causing employment to almost stabilise. Input prices fell for the first time since May 2013 and selling prices dropped at the second-fastest rate since 2009.

Germany enjoyed an upturn in the pace of expansion for a second successive month, but the improved rates of growth seen in both manufacturing and services remained well below the recent peaks seen last summer. New orders rose marginally, an improvement on the declines seen in the final two months of last year, leading to another month of modest job creation. German companies’ input costs fell to the greatest extent since September 2009, despite upward pressure from the increase in the minimum wage, which fed through to the largest drop in selling prices since February 2010.

Commenting on the flash PMI data, Chris Williamson, chief economist at Markit said:  "The Eurozone enjoyed a positive start to 2015, with the PMI survey signalling a strengthening in the pace of economic growth to the fastest for five months. The rate of expansion remains worryingly weak, however, with the PMI running at a level consistent with GDP rising at a quarterly rate of just 0.2%, and the economy both fragile and susceptible to shocks and further setbacks. That said, there’s good reason to believe the rate of expansion will continue to improve in coming months.

"Business confidence in services has already improved, rising to the highest since March of last year, and the additional stimulus in the form of full-scale quantitative easing by the ECB should help to underpin a further improvement in confidence among households and businesses.

"The recent oil price slump is also already feeding through to reduced prices, with average prices charged by companies dropping at the fastest rate for almost five years. The price falls will be a boon to households, but will inevitably fuel growing concerns about the threat of deflation. However, with the January survey showing the largest rise in new orders for goods and services for five months, it seems that lower prices are resulting in higher consumer spending, rather than encouraging households to defer purchases in the hope of lower prices in the future."

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