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 maintaining its recent pace as August’s “flash” or preliminary data - a useful gauge of economic health in the two key sectors, revolved in expansionary territory. 

The long awaited pick-up in services activity across Europe continued to transpire, while the growth in factory activity – for months steering Europe’s two-speed recovery, cooled.

In August, Eurozone business activity expanded at nearly its fastest pace for 15 years, according to the IHS Markit flash composite purchasing managers’ index (PMI). The widely observed survey indicated that the bloc is on track for strong third-quarter growth.

The Eurozone Composite PMI edged lower to 59.5 in August 2021 from July’s 15-year high of 60.2, and slightly below market expectations of 59.7, a preliminary estimate showed. August flash reading which matched June’s final, pointed to a continued solid expansion in the bloc's business activity.

A reading above the 50 mark indicates an expansion.

For the first time since the coronavirus health crisis broke, service sector growth exceeded that of manufacturing amid further easing of coronavirus-induced containment measures.

Eurozone services PMI stood at 59.7 in August 2021, little-changed from the previous month's 15-year high of 59.8 and compared with market expectations of 59.8, a preliminary estimate showed. Although new order growth rates, buoyed by ongoing resurgent demand for services, remained among the highest seen in the past two decades, inflows of new orders cooled from recent peaks. This, as some firms came under pressure from the recent rapid rise in coronavirus cases, consequent to the significantly more transmissible strain – the ‘Delta’ variant, said to have first originated in India. From the employment front, job creation growth was the highest since September 2018.

In August, Eurozone Manufacturing PMI came in lower at 61.5 from 62.8 in the previous month and compared to market forecasts of 62. The reading pointed to the slowest growth in factory activity in six months, although still proving to be robust.

Manufacturing output continued to grow at a pace rarely exceeded in the survey history, resultant to the ongoing recovery in demand from the depths of the unprecedented coronavirus pandemic, though the rate of expansion moderated for a second month to the weakest since February. Slower production growth was primarily linked to supply chain constraints. From the employment front, job creation growth in the manufacturing sector slowed slightly in August, in part reflecting labour shortages. While boosting operating capacity, further job gains helped limit growth in backlogs of new work. Rising backlogs of work were once more commonly associated with supply shortages, consequent to another month of near-unprecedented supply chain disruptions. Suppliers’ delivery times – a key barometer of supply delays, continued to lengthen at one of the sharpest rates ever recorded by the survey. Supply delays, together with surging demand, once again played a key role in driving input costs higher which were then translated on to customers, in the form of higher selling prices.

Confidence in Eurozone’s future direction was in August subdued by rising concerns over the more contagious coronavirus strain.

Indeed, the most recent preliminary data portray an economic recovery being well-underway and one which is maintaining its momentum, despite, once again, facing a rapid rise in coronavirus cases. Services PMI reading has largely remained in-line with July’s 15-year high, while manufacturing, albeit threading lower, has remained robust.

The notable expansion in services witnessed over the past five 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.

Downside risks, specifically related to the health crisis and resurfacing following a rapid rise in infections, brought about by the significantly more transmissible strain, remain.  The ‘Delta’ variant may lead to a slower rebound in parts of the world where vaccination rates, and thus immunisation, are lower. As yet, there is little evidence to suggest that the Euro economic area’s recovery will indeed be derailed.

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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