The flash HCOB Eurozone Composite Purchasing Managers Index (PMI), produced by S&P Global, climbed to 51.9 in February from 51.3 in January, marking a 14th straight month of expansion in business activity. The February reading exceeded expectations in a Reuters poll that had forecast a milder rise to 51.5. Readings above 50.0 denote growth, while those below indicate contraction.
Manufacturing led the improvement, returning to growth territory for the first time since October. The headline manufacturing PMI rose to 50.8 from 49.5 in January. The output component that feeds into the composite indicator strengthened to a six-month high of 52.1, up from 50.5 the prior month. New factory orders also moved back into growth, with the new orders index increasing to 50.9 from 49.2.
"It might be premature, but this could be the turning point for the manufacturing sector as the headline PMI increased to growth territory," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. "Since June 2022 this happened only once, in August of last year. This time, the overall basis for further growth seems to be a bit better."
Services activity improved only marginally, with the services PMI nudging up to 51.8 from 51.6 in January. The modest increase fell short of a Reuters poll projection that had anticipated a slightly larger gain to 51.9.
Across the economy, overall pricing pressures edged higher in February. Firms did raise charges, but the pace of price increases was described as more modest. That restrained pricing dynamic offers little justification to revise current market assumptions that the European Central Bank will maintain its policy rate unchanged for at least the rest of the year.
In sum, the flash PMI report points to a broad continuation of expansion in the euro-area economy, with a notable rebound in factories counterbalancing only incremental gains in services. The data suggest a cautiously improving backdrop for industrial demand while leaving monetary policy expectations essentially intact.
Key points
- Composite PMI rose to 51.9 in February from 51.3, marking a 14th consecutive month of expansion - impacts: overall euro-area growth and financial markets.
- Manufacturing returned to growth: manufacturing PMI 50.8 (from 49.5); output index at six-month high 52.1; new orders 50.9 (from 49.2) - impacts: industrial sector, supply chains, manufacturing stocks.
- Services improved only marginally: services PMI 51.8 (from 51.6), slightly below poll expectations - impacts: consumer-facing services and service-sector-linked equities.
Risks and uncertainties
- Sustainability of the manufacturing rebound remains uncertain - the comment that it "might be premature" to call a turning point suggests downside risk to industrial demand and manufacturing-related markets.
- Services underperformed expectations, indicating potential vulnerability in the dominant services sector that could affect employment and consumer-oriented industries.
- Modest upward pressure on prices, but only limited pass-through into higher charges, keeps ECB policy expectations steady; however, any future acceleration in pricing could alter interest-rate outlooks and bond markets.