EMU: PMI Composite

Thu Apr 05 03:00:00 CDT 2018

Consensus Actual Previous
Composite - Level 55.3 55.2 57.1
Services - Level 55.0 54.9 56.2

The final March PMI data confirm what has been a fairly significant deceleration in overall business activity since the start of the year. At 55.2, the composite output index was only a tick below its flash estimate but, more importantly, nearly two full points short of its final February outturn. This signalled the weakest rate of expansion since the start of 2017.

The final services PMI was 54.9, also 0.1 points below its flash reading and 1.3 points short of its final mid-quarter print. This was its poorest outcome in seven months. New business continued to advance at a solid pace but less quickly than in any month since August. Still, backlogs rose at one of the sharpest rates seen in the past seven years which, in turn, prompted a further gain in headcount. That said, the pace of increase in staffing levels dropped to a 6-month low. Business optimism also declined but remained above its long-run average.

Meantime, price pressures moderated with the rates of both output charge and input cost inflation decelerating.

In terms of composite output, the best performer was France (56.3) ahead of Spain (55.8) and Germany (55.1). Ireland (53.7) and Italy (53.5) were some way behind but all registered multi-month lows.

In sum, the PMI surveys are pointing to a quarterly rate of Eurozone economic growth around the 0.6 percent mark. This would be well short of the 0.8-0.9 percent rate signalled at the start of 2018. Importantly, new business seems to be expanding at a more moderate pace which argues against any re-acceleration this quarter. Pressure on capacity is still high enough to suggest that core inflation should trend higher over coming months but, if the economy really is slowing, its rate of accent is likely to be painfully slow and probably soft enough to ensure no change in ECB policy until September at the earliest.

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.