Is the worst of Europe's slowdown over as PMI recover?

Is the worst of Europe's slowdown over as PMI recover?
The worst of Europe's economic slowdown seems to be over as the PMIs started to improve in January. / bne IntelliNews
By bne IntelliNews February 22, 2024

​The worst of the polycrisis  induced economic slowdown in Europe may be behind us as the flash PMIs released by S&P Global on February 22 start to show signs of recovery, Oxford Economics reports.

" Flash PMIs for February show that the eurozone may be on a slow path towards recovery, as the composite index improved to reach an 8-month high, though it remains in contractionary territory,” the think tanks said in a note. “The rebound is driven by the services sector, in which activity has now stopped falling, while the downturn in industry shows little signs of abating. While encouraging, we still think the economy will struggle to gain traction in the first part of this year.”

As reported by bne IntelliNews, Europe has been plunged into a recession or near flat growth thanks to the cumulative effects of first the coronavirus pandemic, soaring global inflation and more recently the detrimental effects of the war in Ukraine.

The pain and recovery has not been uniformly distributed. A detailed look at the bloc's largest economies shows Germany and France are charting divergent courses. Germany's PMI dipped further into contraction in February as it cements its claim to “sick man of Europe,” exacerbated by a deepening manufacturing slump marked by declining output and new orders.

Conversely, France exhibited signs of economic stabilization, with both its manufacturing and services sectors posting significant recoveries from historically low levels, despite remaining below the growth threshold, Oxford Economics said.

Inflation has also been a big drag on growth, driven up by sky-high energy cost and the price of agricultural goods. The eurozone's inflationary landscape remains complex, with final January figures affirming a continued disinflationary trend across both headline and core metrics. However, the persistence of services inflation, particularly evident in the PMI data, signals potential concerns for the European Central Bank (ECB), possibly influencing its rate policy decisions in the coming months.

Amongst the good news contributing to a recovery has been the impact of shipping disruption in the Red Sea seems to have faded in February, as delivery times improved and manufacturing output prices are still not visibly affected.

The composite PMI index for the eurozone reached 48.9, an eight-month high, up from 47.9 in January, but still in contractionary territory.

The six-month contraction in the services sector has come to an end. On the other hand, industrial activity reportedly kept declining as the index fell by 0.5ppts to 46.1 in February.

“The contrast between services and manufacturing is also visible in the outlook for the next twelve months: sentiment in services registered a sharp improvement in February but fell in manufacturing, representing a downside risk to our forecast of an industrial rebound later in the year,” reports Oxford Economics.

Delivery times shortened in February as the impact of shipping disruption in the Red Sea lessened and firms kept reducing inventories.

“More worryingly, output prices rose strongly once again, due to services firms raising prices at the sharpest pace in nine months, reflecting higher wages pushing input prices up,” S&P Global found. Manufacturing output prices are still on an uninterrupted downwards trend as the worst of the inflation shock starts to wear off.

The composite index for Germany fell further into the red to post 46.1, as the slump in the manufacturing sector intensified due to a fall in both output and new orders, whereas business activity rebounded slightly in services.

France's economy also seems to be bottoming out, as both the manufacturing and services indexes improved markedly in February, though they were starting from record low levels and remain in the red territory. France's composite PMI posted 47.7, up 3.1 points from January, but not yet at the 50 no-change benchmark.

January's final figures kept eurozone headline inflation unrevised at 2.8% y/y, down from 2.9% in December.

“The data confirms that the disinflation process is still well underway, with the slowdown in inflation being broad-based across goods categories,” reports Oxford Economics. “Core inflation moderated to 3.3%, helped by continued rapid core goods disinflation, whereas services inflation remained stickier at 4.0%, the same as in December.”

On a month-on-month basis, services inflation was still substantially higher than the average January change in the period before the pandemic.

“Though one-off price hikes in sectors such as insurance may have played a role in keeping services inflation elevated in January, this broadly confirms our view that services inflation will take longer to normalize due to the high impact of wage growth on overall costs,” reports Oxford Economics.

Eurozone PMIs

Eurozone Composite PMIs


Eurozone headline inflation breakdown