European industry activity slows ahead of ECB deicison

Major European economies expect improvement in their manufacturing sector, according to the latest flash purchasing managers’ indices (PMI) from Germany, France the UK and the Eurozone for January, which register sentiment among businesses. 

Although most of the data was fairly optimistic and showed advances from December, the majority of the numbers were still in contraction territory, sitting below 50. 

The services sector PMIs, however, suggested further deterioration across the bloc. 

Germany manufacturing PMI hits 11-month high

The German HCOB manufacturing PMI rose to 45.4 in January 2024, a step up from the previous month’s 43.3, as well as touching an 11-month high. This also beat analyst estimates of 43.7.

Manufacturing output slowed at the lowest rate in eight months, mainly linked to new orders stabilising somewhat. However, ongoing disruptions and attacks in the Red Sea have started to impact purchasing costs. Due to this and ongoing economic conditions, businesses are quite gloomy about the year ahead.

France sees improving supplier delivery times

The French manufacturing industry showed similar optimism, pulling itself up from more than a three-year low of 42.1 in December 2023, to 43.2 in January. The figure outperformed analyst estimates of 42.5, mainly due to an improvement in supplier delivery times.

However, weaker sales and output levels continued to weigh on the sector. This, in turn, also led to employment levels falling, as several factories cut capacity.

EU services sector sees lagging new business

On the other hand, the Eurozone services sector inched lower to 48.4 in January, down from 48.8 in December. 

This was the sixth contraction in a row for the services sector, mainly due to reduced new business activity and backlogs clearing faster than expected. However, net hiring for service providers improved somewhat.

UK business confidence soars

Turning to the UK, S&P Global composite PMI numbers predicted growth, touching 52.5 in January, from 52.1 in December. This was also higher than analyst forecasts of 52.2 and was mainly due to a boost in the service sector.

However, manufacturing and export sales still dropped to their lowest level in three months, although new orders and employment increased. Input costs also continued on an upward trajectory.

Business confidence was the strongest seen since May 2023. 

Latest indicators ahead of ECB decision

PMI is seen as one of the most precise predictors of what is happening in a certain sector, as it is based on the current sentiment of businesses. The latest PMIs are going to be on the table when the ECB holds its next meeting to decide whether to change the benchmark interest rate on Thursday. 

According to Michael Hewson, chief market analyst at CMC Markets, “When looking at the economic performance of the euro area, we’ve seen little in the way of growth since Q3 of 2022, while inflation has also been slowing sharply. Yet for all this economic weakness, the ECB has been insistent that it is not close to considering a cut in rates, having hiked as recently as last September.

No changes are expected this week with the main ECB refinancing rate currently at 4.5%, however with Q4 GDP due at the end of the month and January CPI due on 1 February, calls for a March rate cut could start to get louder in the weeks ahead.”