EMU: PMI Composite

Thu Jan 04 03:00:00 CST 2018

Consensus Actual Previous
Composite - Level 58.0 58.1 57.5
Services - Level 56.5 56.6 56.2

The Eurozone economy concluded 2017 with its strongest performance since early 2011. The final composite output index was 58.1, a 0.1 point upward revision from its flash estimate and its highest reading since February 2011. The index has now signalled a positive rate of expansion for some fifty-four successive months.

The flash services PMI was similarly adjusted 0.1 points firmer to 56.6, its best outturn in eighty months. As previously indicated, the buoyancy here reflected the sharpest increase in new business in more than a decade together with another sizeable increase in both headcount and backlogs. Against this backdrop, business confidence in the year ahead climbed to a 3-month high and remained strong overall. Meantime, price pressures were mixed. Hence, the rate of cost inflation advanced to its highest mark in six-and-a-half years but output price inflation still eased for the first time in six months.

In terms of composite output the best performing member state was Ireland (60.2) ahead of France (59.6) and Germany (58.9). Italy (56.5) also saw an 8-month high and Spain (55.4) a 3-month peak.

Taken at face value, today's survey data should be consistent with a quarterly increase in Eurozone real GDP of about 0.8 percent. Moreover, the indications are that the first quarter of 2018 will see little, if any, deceleration. If so, it is hard to believe that underlying inflation will not begin to accelerate moving through the first half of this year. If so, this would be music to the ears of the ECB. That said, unemployment in parts of the Eurozone is still historically high and growth would need to be sustained at or around current levels for inflation to pick up significantly in the near term.

The Composite Purchasing Managers' Index (PMI) provides an estimate of private sector output for the preceding month by combining information obtained from surveys of the manufacturing and service sectors of the economy. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) output versus the previous month and the closer to 100 (zero) the faster is output growing (contracting). The report also contains the final estimate of the services PMI. The data are provided by Markit using a representative sample of around 5,000 manufacturing and services companies, the former including Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece and the latter Germany, France, Italy, Spain and the Republic of Ireland.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.