Euro Area Output and New Orders Expand at Faster Rates in June
July 5, 2018 | IHS MarkitEstimated reading time: 5 minutes
The eurozone economy regained some traction at the end of the second quarter. Rates of expansion in output and new business accelerated, although failed to fully recover the momentum lost earlier in the year. The main impetus was provided by the services economy, which saw growth accelerate to a four-month high, offsetting a further waning in the pace of increase in manufacturing production.
The final IHS Markit Eurozone PMI® Composite Output Index posted 54.9 in June, up from 54.1 in May and the earlier flash estimate of 54.8. However, the average reading over the second quarter as a whole (54.7) was the weakest registered since the final quarter of 2016.
National PMI data saw Ireland top the output growth league table, with economic activity rising at the fastest pace in five months. Rates of increase also picked up in Germany, France and Italy. Third-placed Spain was the only nation to see its rate of expansion decelerate (to a 17-month low).
The trends in euro area new business followed a similar pattern to output. New orders increased at a faster pace, with accelerations seen in Germany, France, Italy and Ireland. The mild improvement in demand growth partly reflected a recovery after an unusually high number of holidays depressed activity and new order inflows in May. The latest increase in new business was sufficiently robust to test capacity, with backlogs of work rising for the thirty-seventh successive month.
Recent surveys have nonetheless seen increased company reports of conditions slowing compared to earlier in the year. In some cases this has been due to concerns about rising trade worries, political uncertainty and the impact of ongoing capacity constraints on the pace of economic expansion in the coming months. This was reflected in the trend in business optimism, which dipped to a 19-month low.
June saw further job creation, with the rate of expansion remaining solid and picking up slightly compared to the prior survey month. Employment rose in all of the nations covered, with growth improving in Germany, France and Ireland.
Price pressures increased at the end of the second quarter. Input costs rose to the greatest extent in five months. This fed through to higher selling prices, which increased at the quickest pace since February.
Services
The performance of the eurozone service sector improved at the end of the second quarter. Rates of expansion in business activity, new orders and employment accelerated, while business optimism ticked higher for the first time in four months.
The final IHS Markit Eurozone PMI® Services Business Activity Index posted a four-month high of 55.2 in June, up from May’s 16-month low of 53.8 and the earlier flash estimate of 55.0. The index has signalled expansion in each of the past 59 months. However, the average reading over the second quarter as a whole (54.5) was down from the opening quarter (56.4) and the worst outcome in one-and-a-half years.
Output growth strengthened across the ‘big-three’ euro area service economies in June. Rates of expansion hit four-month highs in Germany and Italy, and a two-month high in France. Ireland recorded the fastest increase of all the nations covered, while third-placed Spain was the only one to see a growth deceleration (to a seven-month low).
Eurozone services new business also rose at the fastest pace for four months in June, with rates of expansion picking up in all of the nations covered bar Spain. This was sufficient to maintain pressure on capacity, leading to a rise in backlogs of work for the twenty-fifth month in a row. Job creation accelerated to a two-month high in response, with sharper increases registered in Germany, France and Ireland.
Growth of output, new orders and backlogs had a mildly positive impact on business confidence†, which improved slightly for the first time in four months during June. That said, the overall degree of business optimism was still the second-weakest seen over the past ten months.
Price pressures crept higher at the end of the second quarter. Input price inflation remained strong and accelerated to an 86-month high. Companies reported higher fuel and staff costs. Part of the increase in input prices was passed on in the form of higher output charges, which rose to one of the greatest extents in the past decade.
Comment
Chris Williamson, Chief Business Economist at IHS Markit, said:
“Eurozone growth regained momentum in June, rounding off a respectable second quarter performance, for which the survey data point to GDP rising by just over 0.5%. June also saw new orders and employment growth perk up, suggesting rising demand continues to motivate companies to expand capacity.
“Firms’ costs and average selling prices for goods and services are meanwhile rising at rates close to seven-year highs, which will likely feed through to higher consumer price inflation in coming months.
“The upturn in the pace of economic growth and resurgent price pressures adds support to the ECB’s view that stimulus should be tapered later this year, but the details of the survey also justify the central bank’s cautious approach to policy.
“In particular, a weakening in business optimism to the lowest for over one-and-a-half years reflects intensifying nervousness about the outlook for the economy, notably in manufacturing, as trade-war talk escalates. Service sector companies – generally less affected by international trade – are more upbeat about the year ahead, though less so than earlier in the year as domestic political issues once again add to uncertainty about the outlook.
“With many service companies – notably transport – dependent on a healthy manufacturing sector, any downturn in trade could soon spill over to the service sector.”
About IHS Markit
IHS Markit is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions.
About PMI
Purchasing Managers’ Index® (PMI®) surveys are now available for over 40 countries and also for key regions including the eurozone. They are the most closely-watched business surveys in the world, favoured by central banks, financial markets and business decision makers for their ability to provide up-to-date, accurate and often unique monthly indicators of economic trends.
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