Eurozone PMI Surges

​The Eurozone has seen two quarters of contracting GDP as many countries went into lockdown. As the lockdowns ease and businesses start to re-open and string consumer demand, then it is highly probably we'll see robust growth in the second quarter of 2021. So what are the PMI's telling us?

Manufacturing PMI

The Markit Manufacturing PMI came in at 63.1 in May which was up on the previous month and above expectations of 62.8. This pointed to new record growth in factory activity. Output growth was the slowest in three months, though it remained close to March’s record with production again underpinned by rapid gains in new orders.

There have been increasing production disruptions in the manufacturing sector due to supply chain issues. Demand is returning quickly as new orders continue to flow in at a fast pace. Therfore, backlogs of work are increasing as supply is struggling to keep up with demand.

Services PMI

The Markit Services PMI came in at 55.2 in May which was up on the previous month and slightly above expecations at 55.1. This was strongest pace of expansion since June 2018. All countries in teh Eurozone recorded an improvement in activity since April, with Ireland and Spain leading the way, following the easing of COVID-19 restrictions. New business rose for the first time since last July, and at the fastest rate for 40 months. Looking ahead, business sentiment hit a 17-year high.

Composite

The Markit Composite PMI came in at 57.1 in May which was up from the previous month but just below expectations of 55.1. With restrictions over recent months mainly focused on services, it is no surprise that the services PMI soared from 50.5 to 55.2 in May with many countries easing restrictions and vaccination programs build momentum.

The Outlook

The combination of demand returning quickly for manufactured products in conjunction with shortages and delays in the supply chain are creating the ideal conditions for a surge in pipeline inflation. We are already seeing significatn increases in input prices and the PMIs show that manufacturing businesses are already passing these higher costs onto consumers. This makes sense as businesses can only absorb higher input costs to a certain degree before before margins get squeezed to the point where they have to pass the higher costs onto the consumer. For services, inflation is behind that of manufcturing but as reopenings continue, we could see service infation moving higher.

Overall, the economic outlook for the eurozone is looking very positive at the moment with stronger growth and inflation pressures increasing. If the re-opening and vaccination programme stay on track and build momentum, then it is highly probable that the pace of economic recovery will improve significantly in the 2nd quarter.