Economy

Bounceback of euro zone manufacturing sector in doubt

PMI surveys of sector showed persistent pessimism among business managers

German businesses pointed to a further slowdown in private sector growth.

Wed May 23 2018 - 10:40

Major euro zone economies have cast further doubt on the expected bounceback of the region’s manufacturing sector after a drab first quarter, as a set of closely-watched surveys of sentiment in the sector showed persistent pessimism among business managers.

Although the purchasing managers’ indices for each of France, Germany and the euro area composite held above the 50 line that separates growth from contraction, each of the gauges came in below analysts’ expectations in May.

German businesses pointed to a further slowdown in private sector growth, with the reading for business activity rising at the weakest pace in 20 months and confidence at its lowest ebb since November 2016. The euro zone composite index meanwhile declined for a fourth successive month, with business indicating deteriorating growth in both manufacturing and services.

Chris Williamson, chief business economist at IHS Markit, urged caution over reading too much in to the findings given an unusually high number of public holidays in the single currency area, though he noted it was “yet another set of disappointing survey results”.

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Although the measure implies a growth rate of just over 0.4 per cent in the second quarter, according to Markit, he added: [It’s] becoming increasingly evident that underlying growth momentum has slowed compared to late last year, especially in relation to exports. Hiring has consequently shown signs of being reined-in. More expensive oil and rising wages are meanwhile continuing to push companies’ costs higher, but weak final demand means firms are struggling to pass these higher costs on to customers.

Some of the fog will hopefully lift with the June PMI data, providing a clearer signal of the underlying growth momentum. Until then, however, it’s likely that the disappointing May survey results will rekindle some concerns regarding downside risks facing the euro area economy

The euro zone closed 2017 on a high, but has stumbled since the start of the year as bad winter weather hit output. Economists had expected that to recover in the second quarter, but the German purchasing managers’ index came in at 53.1 in May, well below the 54.7 expected by analysts in a Thomson Reuters’ poll, while the eurozone headline index came in at 54.1 compared to an expected reading of 55.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, asked whether the data should be captioned “Eurogloom?”. There was “not much to cheer about” in the German data, he said. “Clouds gather over the outlook in Germany... On a headline level, these data send a clear signal that the private sector in the German economy is slowing”.

The euro is trading around 0.5 per cent lower against the dollar on the day, at $1.1715. – Copyright The Financial Times Limited 2018

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