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Eurozone private sector activity improved for a seventh consecutive month in February and continued to be led by the manufacturing sector, survey data from Markit Economics showed Friday.
The Markit flash Eurozone composite output index, a combined index to measure both manufacturing and services sector activities, stood at 53.7 in February, unchanged from January. A PMI reading above 50 suggests expansion in the sector.
The unchanged reading of the Eurozone composite PMI adds to evidence that the economy has continued to expand at a lackluster pace at the start of this year, Capital Economics' European economist Ben May said. Manufacturing output rose for the seventh month running, with the rate of growth accelerating to the fastest since April 2007. Manufacturing new orders and new export orders both increased at the fastest rates since February 2007. Firms reported improved demand arising from the weak euro as well as ongoing recoveries in demand in key export markets and the rebuilding of inventories by customers.
In contrast, service sector activity expanded only modestly in February, having less exposure than manufacturing to the stimulus created by rising international trade and the inventory cycle, Markit said. Services activity increased for the sixth month in a row but the rate of growth slowed for a second month running.
"The manufacturing-services disconnection reflects mostly the export-led nature of the Eurozone recovery, and possibly still some weather-related effects on services activity," UniCredit economist Marco Valli said. Two consecutive declines in the services PMI are not good news, however, the fact that manufacturing activity does not show signs of peaking yet is fairly reassuring that GDP momentum is still on track. "Manufacturing is more reliable when it comes to marking cyclical turning points," Valli added.
Private sector employment fell at the weakest pace since September 2008. The rate of job losses continued the easing trend that has been evident over the past year. Furthermore, in a sign that job losses may slow further in coming months, backlogs of work rose for the third month running in February. In the manufacturing sector, the pace of job losses slowed sharply, though manufacturers continued to see a steeper rate of decline than services.
Input prices accelerated further to the highest level since September 2008 as manufacturers suppliers' delivery time lengthened. Input prices in the service sector rose only marginally. Measured across both sectors, input price inflation accelerated for the fourth successive month to the highest since October 2008.
Further, prices charged fell again, reflecting the fragility of demand, although the decline was the weakest since November 2008. Rates of decline eased in both manufacturing and services, with the latter again reporting the steeper drop.
"The Eurozone economy hardly expanded in the closing quarter of 2009," Commerzbank analyst Christoph Weil said. "We had said that this does not signal the end of the recovery and the purchasing managers' index for the manufacturing sector proves us right."
According to a flash estimate from the Eurostat, the euro area economy expanded at a slower pace of 0.1% in the fourth quarter compared to 0.4% growth recorded in the third quarter.
Separately, Markit said flash Germany composite output index rose to a thirty-month high of 55.4 in February from 54.6 in January. The latest reading was also higher than the long-run series average of 52.7. The manufacturing PMI climbed to 57.1 from 53.7 in January. That was the highest reading in thirty-two months. The manufacturing output index jumped to 60.8 from 58.1 to its thirty-seven-month high. Meanwhile, the PMI for the services sector fell to a three-month low of 51.7 from 52.2.
"The weaker euro has clearly improved the outlook for Eurozone exporters," said Peter Vanden Houte, economist at ING Bank. "It is no surprise that German manufacturers, who are the most exposed to the euro's external exchange rate, showed a dramatic increase in confidence."
The economist sees no need for the European Central Bank to embark on an early tightening cycle with growth picking up gradually and pricing power still largely absent. "We don't expect any rate hike before fourth quarter 2010," he said.
The flash France composite output index fell to 55.7, lowest in five months, from 58 in January. The country's manufacturing sector expanded at the slowest pace in three months. The manufacturing PMI slipped to 54.6 from 55.4. Manufacturing output grew at the slowest pace for six months. On the other hand, the French services activity index dropped to 54.7 from 56.3 in January to a five-month low.
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