Flash PMIs: What to Expect from Eurozone and UK Data

In January, the HCOB PMI survey showed tentative signs of improvement, as contractions in business activity and new orders softened, while growth expectations strengthened to a nine-month high. There was also a stabilisation of employment, which had previously contracted in the final two months of 2023, while export demand fell at its slowest pace since last April.

The seasonally adjusted HCOB Eurozone Composite PMI Output Index, a weighted average of the HCOB Manufacturing PMI Output Index and the HCOB Services PMI Business Activity Index, rose to a six-month high of 47.9 in January, from 47.6 in December.

“Albeit still below the critical 50.0 threshold, and therefore pointing to lower euro area business activity, [in January] it showed the softest rate of decline since last July. A slower contraction in factory production led to the weaker fall in overall output levels during January, offsetting a slightly quicker deterioration in services activity,” said S&P Global in a note.

However, in January, the country-level data were mixed. Economies in the south of the euro area, including Italy, saw economic activity levels improve at the beginning of 2024. “Upturns in Spain and Italy were their strongest for six and eight months, respectively”, said S&P Global. “By contrast, contractions in Germany and France worsened, with the Composite Output Index falling in both instances (but remaining above 2023 lows).”

Will the Eurozone Avoid Recession?

Overall, investors see signs of improvement in the region. “Although the composite PMI index for the Eurozone remains below the 50 thresholds (indicating growth), some signs suggest a possible improvement in the business cycle,” said Marco Giordano, investment director at Wellington Management. As for inflationary dynamics, in Europe we may continue to observe high data volatility. “This reinforces the belief that reducing inflation from 3% to 2% will require thoughtful monetary policy decisions and balanced trade-offs.”

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank (HCOB), said: “The European Central Bank's hesitancy to cut interest rates gains clarity when considering the surge in the PMI price indices. With both input and output prices in the services sector on the rise, the ECB is reluctant to ease monetary policy. However, it finds itself in a tricky situation. This is accentuated by the latest official GDP data for the fourth quarter of 2023, indicating that the economy narrowly avoided a technical recession.”

Red Sea Supply Chain Disruption

As for manufacturing sector, decreases in both input costs and output prices gathered momentum in January, despite suppliers’ delivery times lengthening for the first time in a year following disruption to ships passing through the Red Sea. According to Goldman Sachs, the impact from Red Sea supply chain disruption on Eurozone activities will be limited.

What to Expect from the UK PMI

When “flash” PMI data is released on February 22, we will already have received a raft of data showing the health or otherwise of the UK economy, including inflation, unemployment, wages and GDP.

What sets the purchasing managers’ index™ (PMI®) data apart from this list is that it is more recent, from February.

“Flash” signifies that the numbers are preliminary and are subject to revision, particularly as they are drawn from a calendar month that is not yet finished.

So on Thursday S&P Global produces manufacturing and services PMI data, as well as a “composite” number. 

The PMI data represents the biggest sections of the UK economy, construction, services and manufacturing.

Last month the composite the index number was 52.9, 54.3 for services and 47 for manufacturing. Here 50 is the dividing line between expansion and contraction. So it’s clear to see that services, the dominant part of the UK economy, is expanding faster than manufacturing. The 52.9 for the composite was revised upwards from the flash estimate of 52.5. According to FactSet, the consensus for services PMI is for a reading of 54, below January levels, while the manufacturing PMI is forecast for 47.5, which was above the previous month.

UK GDP Data Was Weak

Last week’s GDP data revealed a worse-than-expected contraction in the UK economy in the last quarter of the year. Services output fell by 0.1% in December 2023, and in the three months to December 2023 it fell by 0.2%, the ONS said. The PMI data will help support or undermine the claim that the UK is “turning a corner” economically, as the prime minister told business leaders. Economic data releases will feed into the chancellor’s equations ahead of next month’s Budget, where he’s under pressure to unveil tax cuts.

This also influences the decision of the Bank of England, which is concerned about wage and price pressures, especially in the services sector. A “tight” labour market is one reason for the Bank not to cut rates, especially as wages grew across the economy by 6.2% in the three months to the end of December, from the same period in 2022.