Euro zone business activity returned to growth in January – PMI

Euro zone business activity returned to growth in January - PMI

LONDON (Reuters) – Business activity in the euro zone bounced back to growth in January, according to a survey which suggested the blocs economy might again escape a contraction this quarter and that the upturn may accelerate.

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

S&P Global‘s Composite Purchasing Managers’ Index (PMI), seen as a good gauge of overall economic health, climbed to a seven-month high of 50.3 last month from 49.3 in December, just ahead of a 50.2 preliminary reading.

January was the first month the index has been above the 50 mark since June.

“A resumption of business output growth, even marginal, is welcome news and suggests that the euro zone could escape a recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

“With price pressures down markedly in recent months, supply constraints easing and near-term energy market worries alleviated by subsidies, lower prices and a warm winter, business confidence has also lifted higher, adding to hopes that the upturn will gather steam in the coming months,” he added.

While demand fell again the new business index moved much closer to the breakeven point and with firms increasing headcount optimism about the year ahead was at its highest since April. The future output index jumped to 60.4 from 55.5.

Activity in the blocs dominant services industry also bounced back to growth last month as consumers shrugged off the cost of living crisis and drove a modest upturn in demand.

The services PMI rose to 50.8 last month from 49.8, its first time above 50 since July.

Although the pace of input cost increases for services firms decelerated they lifted their selling prices at a faster rate. The output prices index rose to 62.0 from 61.0 but this was still below levels seen over much of the past year.

On Thursday the European Central Bank added 50 basis points to its key interest rates to try to tame inflation running at 8.5% in January – more than four times its 2% goal – and explicitly signalled at least one more hike of the same magnitude in March.

“It remains too early to completely disregard recession risks. In particular, the impact of higher interest rates on economic growth has yet to be fully felt,” Williamson added.