Eurozone : positive momentum of business sentiment but pay attention to prices


Despite the positive momentum it would be premature to say that the recovery has started in the Eurozone, but at least we are moving in the right direction.



The monthly S&P Global Purchasing Manager indices are a key source of information to assess the cyclical environment. The chart shows on the horizontal axis how manufacturing and services score in the month of January of this year. Manufacturing is well below 50 and services as well, but to a lesser degree. These readings correspond to a stagnation or at best a very small increase of GDP. The level of a series matters, but it is also important to gauge its recent evolution. And to this end, the vertical axis shows a change of the average index level for the past three months versus the previous three months.


Interestingly, momentum has been positive for both sectors, but even more so in manufacturing. Let's now look in greater detail by adding various sub-series. In manufacturing, we see that most of them have witnessed a significant improvement in recent months. However, employment is a notable exception and points to a subdued hiring activity. In services there is also an improvement, but the employment data have not shown a clear direction. Finally, manufacturing input prices and, to a lesser degree, output prices are below 50, showing that disinflation is at work. However, momentum is positive and delivery times suffer from renewed supply disruption. In services, price pressures remain elevated.


To conclude, it would be premature to say that a recovery has started in the Eurozone, but at least we are moving in the right direction. Further disinflation will be important in this respect, especially considering its impact on the timing and extent of ECB rate cuts.