EU: Markit PMIs, economic activity and inflation pressures
The Eurozone economy entered February amid the ongoing decline in economic activity, and January PMI data showed that output fell in the fourth month.
The Eurozone economy entered February amid the ongoing decline in economic activity, and January PMI data showed that output fell in the fourth month. Interest in PMI data initially focused on the scale of first-quarter GDP decline, according to early readings (with GDP shrinking by 0.6% in the last quarter of 2020).
Publishing flash PMI data for France and Germany offers the opportunity to gather more information on individual country performance. Another area to be aware of is prices. Following the news that Eurozone inflation rose to an 11-month high at the beginning of 2021, albeit partly due to temporary factors, the latest PMI data revealed rising price pressures for companies. While the demand component triggers cost inflation in commodity prices, it is not in a position to contribute due to the economy slowing down due to shutdowns and the deteriorating employment market.
If we look at the details; the service sector continues to remain in a recession zone, showing that business activity in this area is slowing. The service sector in countries and across the region has slowed further due to shutdowns due to Covid-19. While it decreased to 43.6 in France and to 45.9 in Germany, the Euro Area service PMI was valued at 44.7 in February. The manufacturing sector continues to remain on the strong side of economic activity. It has a very strong growth position with 55 in France, 60.6 in Germany and 57.7 in the Euro Area. While the current situation is against the service sector and in favor of manufacturing, anticipation of early reopening as of April due to vaccination has the potential to affect future expectations more positively. However, the recovery on the service sector side is progressing slowly at its current pace.
Make sure that the increase in the manufacturing sector is not an illusion either. Commodity prices have increased with the increasing demand worldwide and a reflection of this will be the increase in production costs in the industry. A price effect that will trigger inflation, prices in the manufacturing industry are already on the rise due to this input cost effect. However, similar price effects in service sector inputs cannot exactly generate inflation because demand is very weak. Recovery across the continent seems to progress more slowly than in the USA. Missing element is demand for inflation… When this comes into play, we will see inflation rise rapidly.