News & Analysis

Today’s eurozone PMIs extended the broad theme of positive surprises in eurozone economic data and have helped allay fears of a deep upcoming recession along with recently warmer weather.

Despite this, however, the latest health check from the flash PMIs now suggests the economic slowdown has broadened to all sectors within the French and German economies. Even the French services sector, which has been the shining light amongst a bleak eurozone economic outlook, recorded a contraction for the first time since March 2021. Although only 2 of the 9 PMI measures released today undershot already depressed expectations, it must be noted that manufacturing firms specifically relied on backlogs of work orders to maintain business activity as new orders continued to fall.

This suggests that the eurozone economy is likely to see continued sectoral divergence, with the manufacturing sector experiencing a significantly worrying downturn.

With the first release of the French data, the worst fears were confirmed: output is falling within the Eurozone for a third consecutive month and avoiding recession in Europe continues to seem highly unlikely. However, the general reading that can be drawn from the PMIs has some positive overtones, as the latest data extends the theme of more resilient economic conditions seen over the last few weeks. France’s private sector, which was the most resilient, contracted for the first time since February 2021 mainly driven by a striking fall in service sector activity. Although the manufacturing data stood out, being two points higher than expected, output volumes continued to fall in November, mainly due to a fall in demand that affected both services and manufacturing, and a drop on income levels, driven by increasing prices and high uncertainty.

However, in both sectors, the declines in new orders exceeded those seen in output. As backlogs in order books are worked through at a rate of knots, the forward looking data on new orders suggests activity levels are likely to fall further in coming months.

In Germany, we see a different story, with a more positive picture across the board. While the services sector remained stable from last month, both composite and manufacturing printed better than October, registering 3–month and 2-month highs, respectively, but still below the 50 threshold which separates growth from contraction. As was the case in France, a combination of higher prices and economic uncertainty has undermined goods and services demand for another month in a row, where manufacturers have reported a steep decline in new orders, although the monthly change was softer than October’s. Also, a weaker rise in input costs due to improving supply chains and falling energy prices favoured the situation of the German manufacturing sector in November. However, pass-through effects in Germany are arguably slow as firms continue to recoup lost profits from previously rising input costs.

This resulted in the prices charged for goods and services increasing at another steep rate in November, which jeopardises a more sticky inflation outlook not just in-country, but within the Eurozone.

Although slightly improving for a second consecutive month, economic outlook and sentiment indicators look pessimistic for both countries. High inflation, low growth and rising interest rates continue to weigh on economic sentiment despite the recent improvement in the energy outlook. Although business activity has fallen for the fifth consecutive month in the Eurozone, the intensity of the downturn seems to have moderated as a consequence of ‘a reduced rate of loss of new business, fewer supply constraints and a pick-up in business confidence about the year ahead’. As for sectors, manufacturers continue to drive the downturn, although services sector output also fell for the fourth time in a row, mainly explained by a drop in new orders for both goods and services in November.

The reaction in the currency market was relatively muted.

After initially falling from daily highs following the slip in the French services PMI, the euro has moderately depreciated as the PMI data points to the euro area economy heading into recession over the winter months. However, the better-than-expected data softened the blow, resulting in relatively limited losses and keeps EURUSD trading at the mid-point of its recent trading range.




Simon Harvey, Head of FX Analysis

María Marcos, FX Market Analyst

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