Euro zone factories are likely over the worst – PMI

Euro zone factories are likely over the worst - PMI

LONDON (Reuters) – The downturn in euro zone manufacturing activity eased again last month suggesting the worst may be over, according to a survey which showed price pressures slackened and the fall in demand moderated, driving a surge in optimism.

S&P Global‘s final manufacturing Purchasing Managers’ Index (PMI) climbed to a five-month high of 48.8 in January from Decembers 47.8, in line with a preliminary reading but still below the 50 mark separating growth from contraction.

An index measuring output, which feeds into a composite PMI due on Friday that is seen as a good guide to economic health, registered 48.9, its highest since June and an improvement from Decembers 47.8. It was nevertheless its eighth straight sub-50 reading.

“Although euro area manufacturers continued to report falling output and deteriorating order books in January … the picture is considerably brighter than the lows seen back in last October heading into the winter,” said Chris Williamson, chief business economist at S&P Global.

“Not only has the rate of output decline moderated now for three consecutive months, but business optimism about the year ahead has also surged higher over the past three months.”

An index measuring new orders moved up closer to the breakeven mark and factories increased headcount at a faster pace. This was reflected in the future output index which jumped to 58.2 in January from 53.8, an 11-month high.

The euro zone eked out growth in the final three months of 2022, managing to avoid a recession, as gross domestic product expanded 0.1% in the fourth quarter, data from Eurostat showed on Tuesday, outperforming expectations in a Reuters poll for a 0.1% drop.

That outperformance was despite sky-high energy costs and rising interest rates taking a heavy toll on the economy.

Although the PMIs input prices index fell last month the index reflecting output prices rose slightly – but still remained firmly below levels seen over much of the past two years.

That will likely be welcomed by policymakers at the European Central Bank who have struggled to bring inflation, which official data later on Wednesday is predicted to show was 9.0% last month, anywhere close to their 2% target.

On Thursday those policymakers are expected to announce another 50 basis-point increase to the Banks deposit rate and follow that up with another 50 basis-point lift in March, a recent Reuters poll found.