To be fair, PMIs are getting harder to read right now. Last month’s slight rebound ends a streak of four consecutive declines in the composite PMI, but remains firmly in contraction territory. While better than analysts expected, the overall picture remains quite bleak for economic growth and adds to contraction concerns. Still, at least today’s PMI indicates that deteriorating conditions have stopped for the moment.
Perhaps that’s a glass-half-full view because the underlying picture painted by the PMI is far from positive. The demand slump is worsening as new orders fell at the fastest pace since late 2020. The manufacturing sector has been performing poorly for quite some time, but the fact that services are the main contributor to the decline in New orders show that weakening demand in the eurozone is becoming more broadly based.
Companies are still working through old orders at this time, which is keeping production reasonable at this time. Still, that suggests a weaker outlook for the coming months. With hiring slowing to a snail’s pace, concerns persist about activity in the coming months. Our base case is that of a continuation of very slow, more or less stagnant growth, which means that a quarter of negative growth is certainly imaginable.
The inflation picture is also becoming more complicated. Rising oil prices and high wage growth have caused input prices to rise again, which is mainly happening in the service sector. In the manufacturing sector, input prices have become deflationary. Still, rising service sector costs have not resulted in accelerated inflation of selling prices. Weaker demand is causing a slowdown in sales prices for services and an absolute drop in manufacturing prices. Music to the ears of the European Central Bank, without a doubt.