Financial markets are awaiting the “flash” estimates for purchasing managers’ indexes (PMI) in the UK and Eurozone on March 21. They are initial estimates for the current month that are subject to revision.
Eurozone Flash PMI
In the eurozone, the HCOB Flash Eurozone PMI, released by S&P Global on Thursday, will provide an updated snapshot of the health of the economy, after the European Central Bank revised down the outlook for GDP growth in 2024 during its March meeting. According to FactSet, the consensus estimate for March's composite index is 49.7, still slightly below the line that marks expansion from contraction. The manufacturing PMI index is forecast to be at 47, while the services PMI is expected to show a reading of 50.5.
In February, 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 from 47.9 in January to an eight-month high of 49.2. Although it remained in contraction territory, the eurozone economy showed signs of stabilising in February.
“Although total output volumes fell for a ninth successive month, the contraction was marginal and the slowest since the middle of last year. Notably, service providers recorded a fractional improvement in business activity, which was offset by a further solid reduction in factory production,” says S&P in its note.
What does PMI Data Mean for Investors?
PMI survey provides important insights for future ECB interest rate decisions. According to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, there are two main insights:
1) Output prices in the services sector continue to surge at an accelerated rate, primarily fuelled by escalating wages.
2) The unexpectedly robust pricing power demonstrated by service providers amid a sluggish economic climate and a forecast of sub-1% growth for 2024 raises eyebrows. This heightens concerns regarding the potential emergence of a wage-price spiral and stagflation, particularly in light of persistent structural labour shortages that threaten productivity.
“Those advocating late rate cuts may very well find reinforcement in the PMI findings,” adds Cyrus de la Rubia.
What to Expect from the UK PMI
This week the PMI data is in competition with UK inflation data and the Bank of England rate decision, which are likely to grab most of the headlines.
But the state of the economy is never far from markets or politicians, with the Spring Budget still relatively fresh in the memory. A reminder: inflation is expected to fall back to 2% this year, according to the OBR, GDP is forecast to grow by 0.8% in 2024 and then increase to 1.9% next year. January saw the UK economy eke out a positive reading, following the fall into recession at the end of 2023.
Back to the data release - on Thursday S&P Global produces manufacturing and services PMI data, as well as a “composite” number. “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.
The PMI data represents the biggest sections of the UK economy, construction, services and manufacturing.
Last month the index number was 53.8 for services, the dominant part of the UK economy, and 47.5 for manufacturing. Here 50 is the dividing line between expansion and contraction.
According to FactSet, the consensus for services PMI for March is for a reading of 53.7, a modest fall on February, while the manufacturing PMI is forecast for 47.8, above the previous month.
Signs of Improvement - in Services at Least
"Both in the eurozone and the UK the pattern is very similar, service indicators are showing signs of improvement, albeit of a low base; while manufacturing in both regions is struggling,” says Michael Field, European equity market strategist at Morningstar.
“Services activity is back on the right track, having turned negative in the middle of last year. This is particularly true for the UK, with last month’s number indicating robust activity in the space. Manufacturing in both regions has been severely hampered by inflation, weak consumer demand, and high energy prices. While inflation has fallen heavily over the last year, it’s the latter two problems that may take significant time to correct," ends Field.
