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While the June PMI surveys indicate ongoing growth of business
activity at the end of the second quarter, a sharp deterioration in
the rate of growth raises the risk of the region slipping into
economic decline in the third quarter. Forward-looking indicators
have fallen to levels consistent with declining GDP given the
current policy path signalled by the ECB. More encouragingly,
inflationary pressures are showing signs of having peaked.
The seasonally adjusted S&P Global Eurozone PMI® Composite
Output Index registered 52.0 in June. Although still indicative of
a modest upturn in private sector output, the latest reading was
down from 54.8 in May, signalling the slowest rate of expansion in
the current 16-month recovery period.
The June PMI reading is indicative of quarterly GDP growth
moderating to just 0.2%, down from 0.6% at the end of the first
quarter (see chart 1).
Worse looks set to come, with forward-looking indicators such as
the survey's new orders and business expectations gauges pointing
to falling output in coming months.
Inflows of new work to eurozone companies stagnated in June,
ending a 15-month sequence of growth. Weakness was principally in
the manufacturing sector, where order book volumes declined
sharply, although services firms reported a significant weakening
of demand growth. Household spending on non-essential goods and
services has come under particular pressure due to soaring prices
but business spending and investment is also waning in response to
the gloomier outlook and tightening financial conditions. Demand,
as measured by new order inflows, is in fact now lagging behind
output growth (see chart 2), pointing to the build-up of excess
operating capacity.
The excess of output relative to demand is substantial by
historical standards and, as shown by chart 3, and suggests -
absent a revival in demand - there is a strong likelihood of GDP
contracting in the coming months as firms adjust capacity lower, in
line with the recent slowing of demand growth.
June also saw a further moderation of business confidence
amongst eurozone firms. The level of sentiment across manufacturing
and services was the weakest since October 2020 and subdued in the
context of historical data, with firms concerned around the
economic outlook and inflationary pressures. The deterioration in
the PMI's future expectations index also took the gauge into
territory indicative of output falling in the coming months (see
chart 4).
By the same token, the survey data also suggests that the recent
robust hiring trend signalled by the PMI survey in June will also
soon start to deteriorate, which will serve to cool the labour
market.
The assertions that the current signals from the new
orders/output comparison and future expectations index are
consistent with economic downturns need to be qualified by the
observation that these gauges have in the past fallen below current
levels without triggering an imminent GDP decline (e.g. 2001, 2004,
2014-15). However, it should be noted that prior periods of
weakness in these indicators were accompanied by policy easing by
the ECB (see chart 6), whereas the current guidance from the ECB is
for an imminent series of rate hikes, which has already led to
tighter financial conditions.
More encouragingly, as chart 6 illustrates, although price
pressures remain elevated, there are signs that inflationary forces
peaked back in April, reflecting a marked cooling of industrial
price growth, improving supply chains and diminished demand.
However, energy and food supply will likely remain two particular
areas of concern and potential inflationary pressures as long as
the war in Ukraine continues.
The latest PMI data therefore suggest that risks have
increasingly tilted towards the economy slipping into a downturn at
the same time that inflationary pressures moderate but remain
elevated.
The full press release is available by clicking
here.
Chris Williamson, Chief Business Economist, S&P
Global Market Intelligence
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
