Euro area activity returns to growth

Markets summary

Eurozone’s business activity, underpinned by a record expansion in the manufacturing sector and an improvement in services signalling a marginal rate of contraction, returned to growth, after four months revolving within a contractionary territory.

In March, Eurozone composite PMI was revised higher to 53.2, from a preliminary estimate of 52.5, signalling the second-fastest increase in private sector output in two-and-a-half years. Manufacturing output - the driver behind Europe’s two-speed economic recovery, significantly grew as operating conditions improved to the greatest degree in nearly twenty-four years of survey history, while services output fell at the slower rate. 

A reading above the 50 mark indicates an expansion.

Overall, new sales increased at the sharpest degree in two-and-a-half years. Moreover, demand increased across domestic and external markets, with new export business rising at the strongest rate in over six-and-half years of data collection. A rise in new business added to the overall workload, with firms, for the first time since November 2018, reporting an increase in backlogs of unfinished business. This spilt over into the labour market. In March, firms chose to take on additional workers for the second successive month and to the greatest degree since June 2019, with employment growth witnessed across services and the thriving manufacturing sector. On the price front, inflationary pressures mounted in March, with data pointing to the sharpest rise in operating expenses for nearly a decade. Supply-side delays proved to be a crucial factor driving input costs higher, particularly within the manufacturing sector.

Finally, confidence in Eurozone’s future direction improved to a 37-month peak amid growing hopes that a vaccination programme will provide the basis for a substantial rise in activity in the second half of 2021.

Eurozone services PMI rose to 49.6 in March 2021 from 45.7 in February and above market estimates of 52.5. This pointing to the slowest rate in a seven-month sequence of contraction. New export business continued to drag on the overall performance, with foreign sales declining for a thirty-first successive month. Operating costs rose for a tenth consecutive month, with inflation rising to its highest since February last year.

Except for Italy, where services remained held down by the coronavirus-inflicted movement restrictions, a broad pick-up was witnessed. Germany, France, and Spain seemed to have coped with movement restrictions better than anticipated.

Italy’s services PMI edged lower to 48.6 from 48.8 in February, and below estimates of 49, as a third wave of the coronavirus pandemic continued to cloud the economic outlook. The dip in services pointed to an eight-straight month of contraction. In March, business activity declined further and at a slightly accelerated pace, amid a decline in new business. This spilt over into the labour market, with firms choosing to trim their workforce.

France services PMI was revised significantly higher to 48.2 from 45.6 in the previous month and above a preliminary estimate of 47.8. The latest reading pointed to the softest contraction in the services sector since December 2020, amid a slower decline in business activity and a faster rise in unemployment, which continues to show signs of a recovery.

In March, services PMI of Europe’s largest economy – Germany, fared surprisingly well despite an increase in coronavirus cases and the ensuing extension of movement restrictions to curb the spread.

Following a five-straight month of contraction in services activity, Germany’s services PMI was revised higher to 51.5 from a preliminary 45.7 in February and above preliminary estimates of 50.8. Albeit underlying demand remained relatively subdued, data showed signs of stabilising towards the end of Q1 2021. The pace of job creation even gathered pace slightly, though it remained modest compared to pre-pandemic trends.

Germany’s better-than-expected performance in services contributed to the growth in their composite PMI, up to 57.3 in March from 51.1 in the previous month.

As services remain burdened with restrictions to mitigate the spread of the coronavirus pandemic, manufacturing, showing greater resilience, remains the main driver behind Europe’s economic two-speed recovery.

Although the more recent data broadly portray an improvement in services and businesses have become more optimistic about activity in a year, the near-term outlook remains somewhat uncertain. The recent uptick in coronavirus infections may force authorities to tighten restrictions, ultimately detrimental to the services sector and Eurozone’s economic recovery. 


Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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