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Slowdown led by waning exports, but risks spill over to
services
Forward-looking indicators point to likelihood of growth
slowdown in August
Flash PMI survey data indicated that the eurozone economy
expanded at the start of the third quarter, but the pace of growth
lost momentum again after a slight upturn in June. Weaker gains in
new order inflows and reduced business expectations of activity
added to the downbeat picture. Price pressures meanwhile remained
elevated, albeit cooling slightly since June.
Softer start to third quarter
The IHS Markit Eurozone Composite PMI fell to 54.3 in July from
June's 54.9, according to the flash reading, which is based on
approximately 85% of usual replies. Although still signalling
robust growth, the latest reading was the second-weakest since
November 2016, only narrowly beating May's recent low.
The July reading is consistent with quarterly GDP growth of
0.4%, down from a 0.5% expansion indicated by the surveys for the
second quarter.
The renewed slowdown goes some way to confirm suspicions that
June's rebound was temporary, largely due to businesses in some
countries making up for an unusually high number of public holidays
in May, and that an underlying trend of slower growth has
persisted.
Manufacturing output grew at a rate unchanged on June's 19-month
low, while business activity in the service sector pulled back from
June's four-month high, yet still registering the second-slowest
expansion seen in the past year and a half.
Additional signs of a slowdown were provided by waning growth of
new business and a further slide in business optimism, notably in
manufacturing, where the surveys saw worries about trade wars
intensify markedly in July. Measured across both sectors, July saw
the smallest increase in new orders since October 2016. New export
orders registered the weakest monthly rise since August 2016.
Reduced optimism
In a further sign that growth of output and hiring may continue
to slow, expectations of business activity slipped to a 20-month
low. Optimism regained some poise in manufacturing, having slumped
to a 31-month low in June, but slid to the lowest since November
2016 in the service sector.
Will trade worries spill over to services?
The data therefore suggest that, while there are signs that
improving domestic demand in many countries is helping drive robust
service sector expansion and support manufacturing, a worsening
picture for export growth is having an increasingly detrimental
effect on manufacturing.
The big question going forward will be the extent to which
domestic demand can remain sufficiently resilient to cushion the
eurozone economy from the potential adverse impact of an
intensifying global trade war. For now, the health of domestic
demand seems encouragingly solid, but any feed-though of trade
worries to other sectors will be a key area of concern to an
already increasingly uncertain outlook. Historical data suggest
that a service sector upturn is rarely sustained without
commensurate manufacturing growth.
Rising prices
Price pressures meanwhile eased, though remained elevated. The
flash PMI survey gauges of input cost inflation cooled slightly in
both manufacturing and services, but at the headline level fell
only modestly from June, recording its third-highest level in seven
years.
Companies continued to report widespread price hikes for fuel
and other oil-related inputs, alongside cost increases for metals
such as steel and, in some countries, rising wage pressures. Price
hikes for raw materials were also again often linked to tariffs,
trade wars, supply chain delays and shortages, with supplier
delivery times widely reported to have lengthened again, notably
from China.
Average selling prices for goods and services rose again as
companies often sought to pass higher costs on to customers. The
latest rise in prices was weaker than the four-month high seen in
June but nevertheless still one of the highest seen over the past
seven years. Goods price inflation continued to run higher than for
services, despite the latter recording one of steepest rises in
charges over the past decade.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Posted 25 July 2018 by Chris Williamson, Chief Business Economist, IHS Markit
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.
