Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

EUROZONE SERVICES PMI DECLINES TO 53.6

The eurozone economy made a disappointing start to 2016. January saw the rate of output growth ease to one of the weakest over the past year. Slower expansions were signalled in both the manufacturing and service sectors, while national PMI data saw growth ease in Germany and Italy. France remained
close to stagnation.

The final Markit Eurozone PMI® Composite Output Index fell to a four-month low of 53.6 in January, down from 54.3 in December and just above the earlier flash estimate of 53.5. Nonetheless, the headline index has remained above the neutral 50.0 mark for 31 consecutive months.

image

There remained some mildly positive signs for the economic outlook, as rising levels of employment and backlogs of work suggested that the upturn would continue during the coming months. Job creation was recorded for the fifteenth month in a row, with the pace of increase only slightly down from December’s four-and-a-half year record. Work-in-hand volumes, meanwhile, accumulated at one of the quickest rates since mid-2011.

January saw an intensification of price deflationary pressures. Average prices charged for goods and services dropped at the fastest rate since last March. On the cost side, input prices fell for the first time in a year. A substantial drop in manufacturers’ purchase prices (the steepest since January 2015) offset a further increase in service sector costs.

Faster output and new order growth were also signalled in Spain, encouraging companies there to raise employment at a faster rate. Slower increases in economic activity were registered in Germany (three-month low) and Italy (four-month low). In both cases this filtered through to the labour market in the form of weaker jobs growth.

The French economy remained near stagnation during January, with negligible expansions of output seen at manufacturers and service providers alike. A similar trend was also seen in both sectors with regards to employment.

January saw business activity in the eurozone service sector rise at the slowest pace for a year. This was highlighted by the Eurozone Services Business Activity Index posting 53.6, down from 54.2 in December and in line with the earlier flash estimate. The latest reading was slightly above the long-run series average (53.0), however.

With France edging back above the stagnation mark, all of the nations covered by the survey were in expansion territory during January. Only Ireland recorded a stronger rate of increase, however, as growth slowed in Germany (three-month low), Italy (two-month low) and Spain (13-month low).

The level of new business at euro area service providers also rose at a moderately slower pace at the start of the year. However, there was brighter news regarding the outlook for the sector. Business confidence† rose to a 56-month high, while backlogs of work and employment increased.

Jobs growth was registered for the fifteenth successive month in January, with increases in payroll numbers registered across all of the nations covered. Rates of expansion ranged from a strong and accelerated rise in Ireland, to a negligible gain in France. Germany, Italy and Spain all saw solid job creation.

Average prices charged by service providers decreased moderately for the fourth month in a row in January, weighed down by discounting among businesses in France, Italy and Spain. In contrast, service providers in Germany and Ireland raised their charges further.

Input price inflation meanwhile eased to the slowest for 11 months amid falling commodity prices. Costs increased at faster rates in Spain and Ireland, whereas input price inflation eased in Germany, France and Italy.

image

CHINA SERVICES PMI BOUNCES BACK

Caixin China Composite PMI™ data (which covers both manufacturing and services) pointed to a stabilisation of Chinese business activity in January, following a slight reduction at the end of 2015. This was signalled by the headline Caixin Composite Output Index registering fractionally above the no-change 50.0 value at 50.1, up from 49.4 in December.

Chinese service providers had a strong start to 2016, with business activity increasing at the fastest rate in six months. This was highlighted by the headline Caixin China General Services Business Activity Index posting up from December’s 17-month low of 50.2 at 52.4 in January. According to panellists, improved inflows of new business underpinned the latest expansion of services activity. Meanwhile, the downturn in the manufacturing sector extended into 2016, with production declining for the second month in a row.

image

In line with the trend for activity, new orders rose at service sector firms, but declined again at manufacturers. Moreover, the rate of service sector new business growth accelerated to a solid pace that was the strongest in three months. A number of respondents mentioned that new product launches and stronger underlying customer demand had helped to lift sales. As a result, composite new business rose slightly in January, after a two-month sequence of reduction.

Divergent employment trends were seen at the sector level, with staff numbers rising at services companies and falling at manufacturing firms during January. Furthermore, the pace of job creation at service providers quickened to a six-month high, with some firms commenting on planned company expansions. However, service sector employment growth did not offset job shedding at goods producers, and consequently staff numbers fell for the eighth successive month at the composite level, albeit only slightly.

After broadly stabilising in December, the level of outstanding business at service providers declined marginally in January. Conversely, backlogs of work increased for the ninth consecutive month at manufacturers. That said, the rate of accumulation was the slowest seen since May 2015. At the composite level, the level of work-in-hand (but not yet completed) fell for the first time in four months (though at a marginal rate).

Services companies and manufacturers both reduced their prices charged in January. The rate of discounting was marginal across the service sector, while goods producers cut their prices at a moderate pace. Average cost burdens meanwhile increased at service providers, though the rate of input price inflation eased to its lowest level in four months. Softer growth of service sector input prices, combined with a solid reduction in manufacturers’ costs, led to a further fall in input prices at the composite level.

Service providers were generally optimistic towards the one-year business outlook in January. Although the overall degree of positive sentiment improved to the strongest since July 2015, it remained much weaker than the series long-run average.