Eurozone private sector downturn continues, UK recovery ticks up

LONDON (ICIS)–The downturn in the eurozone’s private sector continued into January, with new business volumes falling across industries and price pressures intensifying in some sectors, according to purchasing managers’ index (PMI) data for the month.

The region’s deepest contraction since 2013 continued into 2024, but at a more moderate level compared to conditions seen over the last half-year, with the eurozone composite PMI rising to 47.9, a modest monthly uptick that represents its highest point in six months. A PMI of above 50.0 signifies growth.

The slight improvement in conditions was driven by the manufacturing sector, with a reduction in headwinds resulting in a more than a two-point uptick month on month to 46.6, the highest level since March 2023.

Despite Red Sea tensions that have caused delivery times to lengthen, input costs for manufacturers continued to fall on average, according to PMI data compiler S&P Global, although cost inflation continued to increase for goods and services. The eurozone services PMI declined to 48.4 in January, a three-month low.

PMI	January 2024	December 2023
Eurozone composite	47.9	47.6
Eurozone services	48.4	48.8
Eurozone manufacturing	46.6	44.4

The Red Sea disruption has not made as much of an impact as expected so far, according to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which helps to produce the eurozone PMI data.

“Various industry reports indicate that businesses are not caught off guard like they have been previously, having learned from past disruptions. Many have proactively diversified their suppliers across geographical regions and enterprises, mitigating the potential fallout from such unforeseen challenges,” he said.

Continued inflationary pressures in a recessionary environment are an indication that interest rate cuts by the European Central Bank (ECB) may come later rather than sooner, he added.

“Companies have faced higher input prices and were able to pass them through to their customers. As a result, price increases are very much at odds with the recessionary environment. Thus, even as inflation remains an issue, rate increases by the ECB are out of the question at this point in time,” de la Rubia said.

UK GROWTHThe UK PMI moved further into growth territory in January, hitting a seven-month high at 52.5 driven by strong service sector growth and an improving but still negative manufacturing sector performance at 47.3 compared to 46.2 in December.

Although still in contraction territory, the UK manufacturing PMI is at its highest level in nine months, with firms reporting the steepest rise in input costs since August last year, and the industrial sector a key inflationary driver as the impact of the Red Sea disruption hit freight costs.

UK business confidence was the strongest since May 2023 on hopes of stronger economic performance this year, but the “surprising” strength of growth in January and potential for more cost increases as a result of Red Sea tensions could keep inflation and interest rates high.

“The survey data point to the economy growing at a quarterly rate of 0.2% after a flat fourth quarter, therefore skirting recession and showing signs of renewed momentum,” said S&P Global Market Intelligence chief business economist Chris Williamson.

“Supply delays have spiked higher as shipping is re-routed around the Cape of Good Hope, the longer journey times lifting factory costs at a time of still-elevated price pressures in the service sector. Inflation is therefore indicated to remain stubbornly higher in the 3-4% range in the near future,” he added.

PMI	January 2024	December 2023
UK composite	52.5	52.1
UK services	53.8	53.4
UK manufacturing	47.3	46.2

Focus article by Tom Brown

Thumbnail photo: A BMW assembly line in Munich, Germany. (Source: Anna Szilagyi/EPA-EFE/Shutterstock)