Eurozone Economy In Contraction Mode: PMI Data

Image © Adobe Stock

The Eurozone economy was stuck in contraction mode in January, according to the regular PMI survey from S&P Global.

The Eurozone's composite PMI read at 47.9 in January, well underneath the consensus expectation for 49 and below December's 48.8.

A reading below 50 is consistent with contraction and underscores the likelihood that the Eurozone economy is in a period of recession.

"The eurozone economy continues to trend around 0% growth and there are no signs of any imminent recovery. Price pressures are still increasing for the service sector, which provides another argument for the ECB not to hike before June," says Bert Colijn, Senior Economist at ING Bank.

The Eurozone's services PMI read at 48.4 (consensus: 49), which was down from December's 48.8. Manufacturing remains in contraction at 46.6, but this was up on December's 44.4 and above consensus expectations for 44.8.

Indeed, it is the recovery in manufacturing that is likely why Euro exchange rates are proving relatively resilient.

"The composite PMI for January cautiously shows signs of bottoming out but also still indicates contraction. We also note that France and Germany saw declining PMIs, making the increase dependent on the smaller markets," says Colijn.

Germany remains the crux of concern, with both the services and composite PMIs undershooting expectations and indicating contraction.

However, an improvement in the German manufacturing PMI to 45.4 from 43.3 (expectation: 43.7) offers a sliver of hope that the economy's most crucial sector has passed its nadir.

France meanwhile raised eyebrows with a fall in the services PMI to 45 from 45.7 (expectation: 46). France's composite fell further into contractionary territory at 44.2 from 44.8 (exp: 45.2).

Of concerns is the PMI reports of concern around inflation. Even though demand remains lacklustre, services cost pressures are on the rise again due to higher wage costs which are being transferred to consumers.

"For the ECB, enough worries about inflation not trending down to 2% quickly still remain. We think that makes a first cut before June unlikely," says Colijn.