Euro area economic activity maintains positive momentum | Calamatta Cuschieri

The economic scenario within the Eurozone, for quite some time dampened as coronavirus-inflicted movement restrictions negatively impacted services, is seemingly improving as June’s “flash” or preliminary data - a useful gauge of economic health in the two key sectors, maintained its more recent pace.  

The long awaited pick-up in services across Europe continued to transpire, while factory activity maintained its upward trajectory.

The IHS Markit Eurozone Composite PMI rose to 59.2 in June 2021, the fastest pace in 15 years, and slightly above market expectations of 58.8, a preliminary estimate showed. June’s flash reading pointed to a third successive month of accelerating output growth as economies continued to open up.

A reading above the 50 mark indicates an expansion.

Services sector activity rose at the steepest pace of expansion since July 2007 while factory activity in the single currency bloc continued to lead the upturn, expanding at a solid pace for the twelfth consecutive month.

In June 2021, the IHS Markit Eurozone Services PMI rose to 58.0, from 55.2 in the previous month and well above market forecasts of 57.8, a preliminary estimate showed. Meanwhile, the IHS Markit Eurozone Manufacturing PMI stood at a record high of 63.1, unchanged from May’s reading and above market estimates of 62.1.

Consequent to the gradual reopening of economies, new orders, output, and employment increased sharply. New order growth accelerated to the fastest pace since June 2006 and unemployment rose the most in three years.

A renewed surge in demand and brightening outlook prompted firms to take on additional staff for a fifth successive month, boosting employment figures to the greatest extent since August 2018. Despite an increase in job creation, in both service and manufacturing sectors, firms reported the largest accumulation of backlogs of work since data were first available. Accompanying the increase in backlogs were the widespread supply shortages for many inputs. The latter, further lengthening supply chains. Meanwhile, inventories of finished goods fell at the sharpest rate since 2009 following a widespread depletion of warehouse inventories.

On the back of increased demand, inflationary pressures persisted. Average input cost inflation was the highest since September 2000 and prices charged rose at an unprecedented rate, as demand outweighed supply.

Confidence in Eurozone’s future direction rose to an all-time high, buoyed by the recent surge in demand and prospect of economies within the single currency bloc opening further as coronavirus infections drop.

Indeed, the most recent preliminary data portrays an improvement in both services and manufacturing, the former sector certainly portraying a remarkable recovery. The notable expansion in services witnessed over the past three months contrasts markedly with the previous seven months of successive contraction and is largely due to the easing of coronavirus-inflicted movement restrictions employed to mitigate the spread, and vaccination programmes being well under-way.

Certainly, further loosening of restrictions and advances related to vaccination programmes shall bode well.

With virus containment measures set to be further eased in July, we expect what was once a two-speed recovery, driven by manufacturing, to become one aided rather than deterred by the services sector.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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