PMI shows Eurozone business growth rose the fastest in four years

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 23, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - With the ECB expected to announce a slash in interest rate further into the negative territory and boost QE, the Markit Eurozone PMI rose to 54.4 from 53.9 in October, according to the ‘flash’ reading. This is the fastest rate of expansion of output since May 2011.

    Weaker euro led to a pick-up in business activity

    Euro zone businesses reported the fastest rates of growth in business activity and employment in four-and-a-half years in November. The surveys reported that the Manufacturing PMI rose to 52.8 from 52.3, a 19 month high while the Service PMI rose to 54.6 from 54.1, a 54 month high. Employment, new orders and backlogs of work indicators all signalled the strongest monthly expansions in four-and-a-half years.

    Weaker euro was the primary factor that led to the pick-up in the bloc as weak euro made it cheaper for foreign buyers to purchase goods and services.

    The recovery was primarily e led by the service sector. Business activity and new business in this sector rose at the fastest rates since May 2011 while employment showed the biggest monthly gain for five years.

    Manufacturing output growth was also impressive. New export orders for manufactured goods increased at the fastest rate in six months leading the manufacturing PMI to register a 19 month high. Largest monthly improvement in order books since April 2014 led the manufacturing output growth to reach a three-month high. Factory headcounts increased as firms raised capacity in line with the improved demand environment.

    The survey showed deflationary pressures continued to exist in the euro zone despite the recent upturn pointing towards a possible recovery. Average food and services prices fell marginally while average input increased only slightly.

    Growth in Germany's private sector accelerated

    Euro zone’s biggest economy, Germany recorded three-month high growth. The growth was fostered by the biggest monthly improvement in new business in two years. The increase in business activity and new orders in the service sector were however slightly offset by a decline in manufacturing. The increase in number of people employed in both the service and manufacturing sector led to the largest jump in employment in nearly four years.

    Germany managed to grow despite worries of a China slowdown and the emissions scandal at car maker Volkswagen.

    Composite PMI in France fell to 51.3

    France's composite PMI fell to 51.3 from 52.6 in October. The survey released today showed France's economy slowed following the Paris attack on 13th November that caused security to be tightened across the country. The surveys are the first measure of French economic activity released after the Paris attack.

    According to surveys, business activity rose at the slowest rate for three months (July-September), showing poor service sector growth. Many hotels and restaurants have blamed the Paris attack for a decline in activity in the service sector. Manufacturing output growth also slowed though there was a slight rise in new orders.

    Other details recorded by the French surveys point to continued growth in the months ahead, with new orders picking up. However, businesses cut some jobs, a sign they aren't confident that demand will continue to rise.

    The French economy returned to growth in the third quarter after having stagnated in the three months to June. The unemployment rate however still remains very high. PMIs for October and November indicate the French economy is likely to grow at 0.3% rate in the final quarter matching Q3’s performance.

    The drop in French PMI is not however strong enough to offset the recovery process of the whole bloc, which recorded its strongest expansion in more than four years.

    What does the PMI figure imply?

    The Markit Euro zone Composite PMI showed that the economy in the bloc has gathered fresh momentum after its third-quarter slowdown. Data firm Markit said the headline measure of activity known as the composite purchasing managers index, rose to 54.4 in November from 53.9 in October, its highest level since May 2011. A reading above 50 indicates an increase I activity, while a reading below that level shows a dip. The survey suggests that growth may accelerate further in coming months, since new orders where also at their highest since mid-2011, along with new hiring.

    However, continued development will depend on how weakened business and consumer confidence will be as a consequence of the Paris attack on 13th November and the Brussels lockdown over the 21st-22nd November weekend. Tighter controls at borders will not only slow trade but also affect tourism as tourists may stay away from some of Europe’s most visited tourist destinations.

    As a result the surveys showed that despite an increase in activity the businesses continued to cut their prices. The incident that will likely hit consumer spending hard has made it all the more difficult for the ECB to boost the annual rate of inflation to its target of just under 2% from 0.1% in October.

    The Paris attack together with disappointing inflation data has compelled the ECB to consider extension and expansion of the QE programme as well as a rate cut further into the negative territory. ECB chief Mario Draghi has highlighted the central bank’s disappointment with economic indicators. Given the circumstances, November's slightly improved PMI reading will not be able to convince policy makers to rethink their easing stance.
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