Edge and Odds

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Edge and Odds

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EUROZONE MANUFACTURING PMI POINTS TO 4% PRODUCTION GROWTH

The eurozone manufacturing sector ended 2016 on a high note. At 54.9 in December, up from 53.7 in November, the final Markit Eurozone Manufacturing PMI® posted its best reading since April 2011 and was unchanged from the earlier flash estimate. The average for the final quarter (54.0) was solidly above that for the third quarter (52.1) and signalled the fastest growth since the second quarter of 2011. Moreover, the average PMI reading over 2016 as a whole (52.5) was the highest annual average since 2010.

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imageNational data pointed to a broad-based improvement in operating conditions, with headline PMI readings rising in all seven* of the countries covered by the survey. Growth was strongest in the Netherlands and Austria, with rates of expansion hitting levels last achieved over five-and-a-half years ago. PMI indices hit a near three-year high in Germany, an 11-month peak in Spain and a 67-month record in France. Italy, in sixth position overall, also saw its pace of growth improve, while the rate of contraction in Greece eased to the weakest during the current four month sequence of decline.

Underlying the improved performance of the eurozone manufacturing sector was faster growth of production and new orders. Rates of expansion in both were either at, or close to, the steepest since early-2011. Six out of the seven* nations covered by the survey saw faster increases in output and new business. The exception was Greece which recorded weaker rates of contraction.

Companies reported improved levels of new work received from both domestic and non-domestic clients. New export business** rose at the second quickest pace since April 2011, bettered only during this sequence by that achieved at the start of 2014.

Part of the increase in foreign demand reflected a boost to competitiveness from the euro exchange rate. Faster growth of new export business was seen in France, Italy, Spain, the Netherlands and Austria. The rate of increase slowed in Germany, while the pace of decline eased in Greece.

Stronger demand led to pressure on manufacturing capacity, as highlighted by the rate of backlog accumulation hitting a 68-month record. This in turn resulted in further solid job creation, with staffing levels rising in almost of the nations covered (Greece saw a slight decrease).

Price pressures intensified during December. Higher import costs resulting from the depreciation of the euro, combined with increased global commodity prices, led to the sharpest inflation of average purchasing costs for over five-and-a-half years. Strong and accelerated increases were seen in all seven* nations covered.

There was also some suggestion that supply chain pressures were leading to higher costs. Average vendor lead times lengthened to the greatest extent since June 2011.

The increase in input costs was passed on (in part) to clients during December. Output charge inflation accelerated to the quickest pace since July 2011, as selling prices rose across all of the nations covered by the survey. The steepest increases were registered in the Netherlands, Spain and Germany.

Chris Williamson, Chief Business Economist at IHS Markit:

To put the PMI data into perspective, the five-and-a-half-year high reached in December is broadly consistent with factory output growing at an impressive annual rate of approximately 4%.

CHINA MANUFACTURING PMI RISES ON STRONGER DOMESTIC DEMAND

Manufacturing companies in China reported the strongest upturn in operating conditions since January 2013 at the end of 2016. Production expanded at the fastest pace in nearly six years, supported by a solid increase in total new work. As a result, companies raised their purchasing activity at a quicker rate than in November, which led to a renewed increase in stocks of inputs.

However, employment continued to decline, as companies made efforts to reduce their costs. Nonetheless, input price inflation picked up to its sharpest since early 2011 amid reports of higher raw material costs, which prompted firms to raise their selling prices at a marked rate.

The seasonally adjusted Purchasing Managers’ Index™ (PMI™) picked up from 50.9 in November to 51.9 at the end of 2016. Although modest overall, the latest reading pointed to the fastest rate of improvement in the health of the sector since January 2013.

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A further rise in production at Chinese manufacturers supported the higher PMI reading in December. Notably, the rate of output growth accelerated to a 71-month high, with a number of panellists commenting on stronger underlying demand and new client wins.

This was highlighted by a sustained increase in new business during December. As was the case for output, the rate of new order book expansion accelerated since November, and was the strongest since July 2014. Data indicated that improved domestic demand was the key driver of
new business growth, however, as new export sales were unchanged in December.

Greater intakes of new work imparted further pressure on operating capacity in December, with backlogs of work increasing for the tenth month in a row. Moreover, the rate of accumulation was the strongest since July. There were also reports that fewer workers had also contributed to higher amounts of unfinished work.

Chinese manufacturers reduced their workforce numbers for the thirty-eighth month running, though the rate of job shedding was moderate overall. A number of companies mentioned that efforts to reduce their costs had underpinned the latest fall in staff numbers.

Higher amounts of new work led firms to raise their input buying again in December, and at the quickest rate in 29 months. As a result, stocks of purchases rose for the first time since September, albeit only slightly. Meanwhile, inventories of finished items continued to accumulate at a marginal pace.

Stronger demand for inputs led to a further lengthening of average delivery times, as some firms commented on shortages at suppliers. Notably, the rate of deterioration in vendor performance was the fastest in eight months. Inflationary pressures remained sharp in December, with average input prices rising at the fastest rate since March 2011. Output charges also rose sharply, despite the rate of increase softening slightly since November’s 69-month record.