Euro area economic activity remains in expansionary territory

Business activity in the Euro economic area, previously witnessing a strong recovery momentum following a resumption to normality, owing to the easing of coronavirus-inflicted restrictions and improved immunisation, moderated, as September’s Composite PMI data - a useful gauge of economic health in the two key sectors appears to have just past the peak rate of growth. Shortages of inputs is said to have impeded both manufacturing and service sector output.

For a second month running in September, manufacturing and services, the latter previously posing a drag on the euro economic area recovery as the infection rate persisted, retreated from the 15-year peak recorded in July.

In September, the Eurozone Composite PMI was revised slightly higher to 56.2, from a preliminary estimate of 56.1 and lower than the previous month’s reading of 59.0. Although indicative of a strong expansion in business activity, September’s reading marked a significant slowdown. The slowest growth in private sector activity in five months.

For the first time since the coronavirus health crisis broke, service activity growth, despite the weakest in the previous five months of expansion, exceeded that of manufacturing, reflecting the latter’s sensitivity to ongoing supply-related issues.

Eurozone Services PMI stood at 56.4 in September 2021, slightly higher when compared to preliminary expectations of 56.3 and lower than the previous month's reading of 59.8. During the latest survey period, new business from overseas grew only marginally following relatively strong increases in the previous three months. From the employment front, job creation continued at a strong pace, although the rate of employment growth slowed to a four-month low. A further rise in recruitment came amid an increase in the level of work-in-hand; orders which have been received but not yet completed.

Inflationary trends for both input costs and output prices persisted in September. Input costs rose at the fastest pace since mid-2008, while output price inflation remained among the highest in over 20 years. On the back of a continued global economic recovery from the coronavirus pandemic, the degree of optimism within the services sector remained strong for the coming 12-month period.

In September, Eurozone Manufacturing PMI stood at 58.6, largely unchanged from a preliminary estimate of 58.7 yet notably lower from the previous month’s reading of 61.4, as rates of expansion in output, new orders, and employment, cooled. Albeit being the lowest since February 2021, September’s reading pointed to another month of strong improvement in operating conditions. 

Following on, from the sharp rates of increase in previous months, new export orders grew at the slowest rate since January 2021. Softer demand in addition to supply constraints proved to be a key interruption to production schedules during the month. Delivery times amid shortages of electronic components, raw materials, container availability, and logistical problems arising in parts of Asia, continued to lengthen at a substantial degree. Impact of such supply chain issues were evident in both input costs and output prices. To protect profit margins, manufacturers increased their output prices at a quicker extent. From the employment front, job creation growth in the manufacturing sector slowed to a six-month low. Confidence in Eurozone’s future direction in September marginally rose.

Indeed, the most recent data portrays an economic recovery being well-underway and one which is maintaining its momentum, despite the challenges being faced, notably in regards to supply chains and subsequent pricing pressures. Both Manufacturing and Services PMI readings, albeit moderating, pointed to a strong expansion in business activity.

The expansion in services witnessed over the past six 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. To-date, the vaccination rate among the largest Eurozone countries exceeds 70 per cent of the populations.  

Downside risks, specifically related to; the health crisis as we approach the colder months, supply chain disruptions, and inflationary pressures remain.

Although there is little evidence to suggest that the Euro economic area’s recovery will indeed be derailed, consequent to an uptick in coronavirus cases, downside risks remain. Researchers have as yet not confirmed the theory that coronavirus will become a seasonal virus, however, growing evidence suggests that a small seasonal effect may probably contribute to bigger outbreaks in winter. This, on the basis of what is known; how the virus spreads and how people behave in colder months.

Supply chain disruptions, may possibly in the short-term persist. Inevitably, leading to longer suppliers’ delivery times – a key barometer of supply delays. Supply delays, together with increased demand, as the economy continues to recover, may continue to play a key role in driving input costs higher which are then translated on to customers, in the form of higher selling prices. The latter, giving rise to inflationary pressures.

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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