Eurozone flash PMI signals strong expansion in February

Eurozone flash PMI signals strong expansion in February, moving up a gear. Despite, the concerning EU political events in 2017, will the growth lift even higher in the coming months on new orders?

28 February, Orbex – The modest pace of economic recovery in the Eurozone continued to chug along in the second month of this year, despite uncertainty from the political side of the spectrum continue to loom which could potentially plunge the region into further chaos.

Eurozone composite PMI came in as a surprise

Preliminary data from IHS Markit, released on Tuesday last week showed that the Purchase manager’s index for the eurozone’s manufacturing and services sector rose to 56.0 in February, up from 54.3 in January and was the highest level on record since April 2011. The Eurozone flash PMI signals strong expansion, which came in as a surprise.

IHS Markit, Eurozone PMI Eurozone PMI (56.0). Source: IHS Markit

The recovery in the Eurozone, if confirmed by the final estimates could signal a second month of strong expansion in the sectors. The new orders data was also positive showing that business activity could continue to expand over the coming months. New orders increased at the fastest pace in six years according to the preliminary release with businesses seen hiring additional workers to meet the demand. The pace of hiring also set a record, rising to the highest pace since August 2007.

Eurozone flash PMI signals strong expansion

  • Flash eurozone PMI composite output index 56.0 vs. 54.5 in January
  • Flash eurozone PMI services index 55.6 vs. 53.7 in January
  • Flash eurozone PMI manufacturing output index 57.2 vs. 56.1 in January
  • Flash eurozone PMI manufacturing index 55.5 vs. 55.2 in January

Commenting on the release, Chris Williamson from IHS Markit said that the economic momentum in the eurozone “moved up a gear” in February and was optimistic that growth could even lift higher in the coming months on new orders.

In terms of the impact from the PMI readings on the GDP, the IHS Markit’s chief economist expects the eurozone’s quarterly economic growth to reach 0.6%. If confirmed, this could potentially see a 0.4% rate of expansion recorded from the third and fourth quarters of 2016.

France play’s catch up – Optimism among businesses grows

Playing catch up to Germany, France was also contributing to the composite PMI increases. In France, the composite PMI rose to the highest level since May 2011, in what looks to be a gradual improvement in the economy.

Eurozone PMI Output Germany, France, and Rest of Eurozone PMI Output Comparison. Source: HIS Markit

Front runners in the election, Emmanuel Macron, and Marine Le Pen have been building their campaign base rejecting President Hollande’s economic policies which have failed to create jobs or growth for the region.

Macron considered a pro-growth and pro-EU candidate is seen as a centrist. He has promised that he would focus on easing the labor laws in a bid to tackle the unemployment problem. The French unemployment rate fell to 10% in the three months ending December 2016, following a modest upward revision of 10.1% in September. At 10.0%, French unemployment rate is still at historically high levels.

France unemployment rate France Unemployment Rate: 10.0%, (three months ending December 2016). Source: Tradingeconomics

Macron’s contender, Marine Le Pen who is running neck to neck brings more radical changes to the campaign. Including promising to hold a referendum to pull France out of the EU. But, also to abandon the EU’s fiscal discipline. Francois Fillon, who hasn’t been entirely written off from the election campaign, is the conservative candidate. Who plans to implement deep austerity measures by increasing taxes for consumers and cutting taxes for businesses.

A positive sign for the ECB?

While the candidate’s promises do bring a lot of uncertainty. French businesses seem not to be concerned much. Unlike the French bond markets, which have seen investors cutting exposure pushing yields higher on increased uncertainty. On top of this, businesses were also seen increasing prices at the fastest pace in over 5 years. Which is also a positive sign for the ECB as the data points to continued inflationary pressures. The ECB has struggled to push inflation towards its 2% goal for the past four years.

Despite the positive developments in the Eurozone’s economy, many are still skeptical about the current trends. The ECB, for one, has signaled that policy makers were not in a rush to cut back QE purchases. The central bank also brushed off the recent rise in inflation citing that core inflation remained stuck at 0.9%. Moreover, some experts also believe that the Eurozone would not be able to sustain the current pace of growth especially as it faces regional elections, Brexit and the U.S.’s protectionist policies all of which could post strong headwinds for growth.

About the contributor

The article, Eurozone flash PMI signals strong expansion, was written by John Benjamin. An analyst from Orbex – an AtoZ Approved Forex Broker.

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