European PMIs: A return to growth outside of France

Eurozone PMIs: France the exception to growing momentum: A budget-related deterioration in the French economy masked improving momentum in the rest of the eurozone in February. We calculate that excluding France, the composite PMI for the remainder of the eurozone increased from 50.7 to 51.5, the highest since June 2024. That gives us some confidence in our view that after stagnating in Q4, European Central Bank interest rate cuts and rising real incomes will support a return to modest growth. A result in the German election on Sunday that enables Friedrich Merz’s CDU/CSU to form a workable coalition is critical to maintaining the recent improvement in German economic activity. France is likely to remain a problem as the need to offer concessions to the left in a deeply divided parliament leads to backsliding on the Macron reforms that had helped the French economy to outperform.

The dichotomy between the contraction in the manufacturing sector and growth in services continues. But the rise in manufacturing output balances a little closer to 50 offered some indication that the trough is in sight (see Table). The details of the survey also offered some encouragement by suggesting that the destocking cycle is easing: both the new orders and backlogs of work balances rose closer to the 50 mark too.

French budget weighs: The fall in the French composite PMI to a two-year low while the rest of the eurozone performed better suggests that the budget agreed at the beginning of February has dealt a significant blow to business sentiment. The government will raise revenue by imposing one-off levies on large corporations and high-income individuals. In future years it hopes to make up that revenue by reducing tax evasion. But the need to carry out further fiscal consolidation in the future raises the question whether tax hikes this year will really be a one off. That is sapping business confidence and appears to have led French firms to cut back on employment – the composite employment index slipped further from 47.4 in January to 46.4, its lowest level since June 2020.

Germany at a turning point: According to the composite index, economic activity in Germany is turning up. The German composite PMI rose to 51.0 in February, significantly above the 47.8 average in Q4 that flagged a 0.2% qoq contraction. That suggests that German growth could turn positive earlier than we anticipate – we forecast flat GDP in Q1. Whether economic momentum can be sustained depends crucially on the outcome of the Bundestag election this Sunday. The polls suggest that a CDU/CSU coalition with the SPD is the most likely outcome, which would open the door to pro-growth reforms. Whether the centrist parties can garner the two-thirds majority needed to loosen the debt brake is a closer call. See “All you need to know about the German election” (21 February) for more detail.

UK policy is causing job losses: The alarming further slump in the employment balance of the UK survey in February suggests that firms are making significant cuts to employment (see Chart 2). The further drop in the employment balance from 45.3 to 43.5 took it to its lowest level since 2009 outside of the pandemic. That is alarming, albeit mitigated somewhat by the likelihood job losses are be focussed in part-time work and on younger staff. That is where increases in the minimum wage and payroll tax on 1 April will bite hardest. Indeed, despite job losses output was stable. Growing momentum in services activity offset a deepening contraction in the UK manufacturing sector. The latter is probably linked to very high industrial energy costs. Meanwhile, the sustained increase in output prices supports our view that disinflation in core prices is stalling, and that headline inflation will rise to 4% in the second half of the year.

Other data released this morning support our view that consumer demand is reasonable, with job losses instead due to the rise in labour costs that are resulting from government policy. After four consecutive mom declines, some rise in retail sales was likely. In the event, the 1.7% mom rise retail sales in January beat the consensus forecast of 0.5% mom by a wide margin. That comes on the heels of a very good month for consumer services in December according to the detail of the monthly GDP data.

However, there was a major downside surprise in the monthly public finances data for January which caused borrowing in excess of the official fiscal forecast in the year to date to balloon out to £12.8bn up from £4.1bn previously. The Chancellor’s “headroom” had already been erased by higher interest rate assumptions and disappointing growth. Higher borrowing on top of that suggests that significant savings/revenue increases will be needed to meet the fiscal rule.

Table: European PMIs

Bloomberg poll: consensus expectations. The headline manufacturing figure is a weighted average of new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%). For the PMI calculation the suppliers’ delivery times index is inverted so that it moves in a comparable direction to the other indices. Sources: S&P, HCOB, CIPS, Bloomberg

Chart 1: PMI – Composite output

PMI survey data, values above 50 indicate economic expansion. Sources: S&P, HCOB, CIPS

Chart 2: PMI survey indicates a large fall in UK employment

Note that the payrolls data is only available from 2014. Sources: S&P, CIPS, Haver

Andrew Wishart

+44 20 3753 3017

andrew.wishart@berenberg.com
www.berenberg.com

Berenberg
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