PMIs to Shed Light on EU and UK Trends

There is an abundance of upcoming economic data for the rest of the February 19-23 week that can provide a fresh overview of the state of the global economy, particularly regarding the trends in growth and inflation. 

In particular, Thursday, February 22,  sees the release of flash Purchasing Managers' Index (PMI) data on the Eurozone and UK economies, providing an early indication of economic activity and sentiment in the manufacturing and services sectors. In addition, the Eurozone inflation figures will come on the same day. 

The PMI surveys are expected to show if the supply chain disruptions caused by recent attacks in the Red Sea are significantly affecting European manufacturers. So far, the impact has been limited, and policymakers and financial markets may want to monitor the data closely for clues on whether this continues to be the case.

Decoding Eurozone Activity

The Eurozone will publish its flash PMI data on Thursday, February 22, with expectations indicating continued possible contraction below the 50 mark. Manufacturing PMI is expected to increase to 47.1 from 46.67, while the services PMI is projected to rise to 48.7 from 48.4. Both forecast suggest a possible improvement compared to January. January's release showed that business activity in the euro area fell at the slowest rate in six months. Moreover, although inflation continued to slow, the numbers were consistent with a 3% CPI, largely above the central bank's 2% target. 

On Thursday, annual CPI inflation in the Euro Area is expected to stabilise at 2.8%. For reference, in January, it was reported that Eurozone inflation declined 2.8% year-on-year (YOY)from 2.9% prior, in line with market forecasts. Additionally, although energy prices fell by 6.3%, services inflation remained steady at 4%. In Spain, for example,  inflation climbed to 7.4%, higher than the 6.6% recorded in December due to external factors like Ukraine and the Red Sea crisis. In contrast, other major EU economies like France, Italy, and Germany saw their annual inflation rates fall.

UK Diverges Away  

In the UK, the PMI data will help assess if the economy is turning a corner, as claimed by Prime Minister Rishi Sunak, especially after the UK entered a recession in the last quarter of 2023. The upcoming manufacturing and services reports are expected to show manufacturing rising to 47.5 from 47, while services are expected to hold steady at 54.3, supported by lower interest rates.   

The prior PMI report, which was published in January signalled recorded the fastest growth in eight months, with polled businesses becoming more optimistic. Services drove the improvement, citing improved client confidence and recovering demand due to lower borrowing costs. Rising ocean freight rates contributed to higher manufacturing costs, with input costs rising faster since March 2023. 

The figures contrast with a continued downturn in the Eurozone, where the composite PMI barely changed.

PMIs to Shape Policy?

While the Eurozone and UK economies still face challenges, the upcoming PMI data could point to early signs of stabilisation or improvement compared to January.

A weaker European PMI report could prompt a more dovish policy stance from the European Central Bank (ECB) or its various policymakers. Accordingly, inflation and wage growth expectations will likely remain the key focus going forward. The Eurozone's wage growth slowed to 4.5% from 4.7% in the last quarter of 2023. However, economists believe this is unlikely to ease ECB concerns over high inflation or convince them to cut as soon as April. The ECB is still expected to cut interest rates in 2024 to boost growth amid slowing inflation and a weakening eurozone economy. Only last week, the European Commission (EC) cut its 2024 growth forecast for the Eurozone 2024 to 0.8% from 1.2% prior. Moreover, according to Bundesbank, Germany's economy is likely in a recession now. Another issue is that unemployment remains at a record low.

On the other hand, the UK data expectations suggest positive growth in the first quarter of 2024, potentially ending the recession fast. Services inflation and wage growth will remain a focus for the Monetary Policy Committee (MPC), though a strong PMI report could push back expectations for the first interest rate cut by the Bank of England (BOE). The central bank will likely cut interest rates to boost the economy further but will be guided more by inflation and wage growth than growth figures. BOE Governor Andrew Bailey said that interest rate cuts this year were reasonable given the economic outlook, though the economy showed signs of recovery. (Source: Reuters)

Conclusion

Upcoming PMI data from the Eurozone and the UK will provide insights into the state of economies. In Europe, the flash PMIs are expected to show continued contraction but possibly an improvement over the previous month. 

A soft PMI report could prompt a more dovish stance from the ECB. In the UK, PMIs are forecast to signal growth in the first quarter and possibly end the recession. BOE Governor Andrew Bailey said rate cuts were reasonable given the economic outlook. 

The upcoming PMI data could indicate early signs of stabilisation or improvement in both economies, providing important insights to investors and traders alike.