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

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EUROZONE SERVICES PMI RISES TO 54.2

The eurozone economy ended 2015 on a positive note, with the rate of expansion in output rising to a four-month high and growth over the final quarter as a whole the quickest in four-and-a-half years. The expansion was broad-based, with December seeing activity rise across Germany, France, Italy, Spain and Ireland.

The final Markit Eurozone PMI® Composite Output Index rose to 54.3, up from 54.2 in November and above the earlier flash estimate. The headline index has now signalled expansion for 30 successive months. Solid output growth was recorded in both the manufacturing and service sectors, with the former slightly outpacing the latter for the first time since November 2014.

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Italy rose to second position – with growth accelerating to a 58-month record – followed by Germany (17-month peak). The pace of increase in Spain slowed slightly, but remained solid nonetheless, while France eased close to stagnation. The respective average PMI Output Index readings for the final quarter as a whole signalled expansion for all of the nations covered by the survey.

Underpinning the latest expansion of eurozone economic activity was a robust increase in incoming new business in December. This exerted pressure on capacity, leading to an increase in backlogs of work for the seventh month running and further job creation (the steepest since May 2011). Staffing levels rose in Germany, Italy, Spain and Ireland (with rates of increase improving in Germany and Italy) and were unchanged in France following a three-month sequence of job cuts.

Average input prices rose at the quickest pace for four months in December, mainly due to higher import costs arising from the depreciation of the euro and some evidence of rising staff costs. Prices charged, meanwhile, fell slightly for the third consecutive month, suggesting that companies had (on average) struggled to pass on higher costs to their clients. Only Germany and Ireland reported increases in output charges.

Services:

The eurozone service sector continued to expand at a solid clip during December, with the rate of growth in business activity identical to November’s three-month high. This rounded off a relatively positive year for the sector, with average growth for 2015 as a whole the fastest since 2010.

The Eurozone Services Business Activity Index posted 54.2 in December, up from the earlier flash estimate of 53.9 and a level above the neutral 50.0 mark for the twenty-ninth straight month. Output expanded in Germany, Italy, Spain and Ireland.

Rates of growth accelerated to a 17-month high in Germany and a 69-month record in Italy, but eased in Spain and Ireland. France was the only negative spot, with its service economy slipping back into mild contraction following a ten-month sequence of sustained expansion.

Underlying the latest increase in eurozone service sector business activity were rising inflows of new work and improving business optimism. Although the rate of growth in new orders eased from November’s high, it was nonetheless among the strongest registered over the past four-and-a-half years, with increases seen in all of the nations covered by the survey. Meanwhile, business optimism rose to an eight-month high.

The increase in new orders exerted pressure on capacity, leading to an increase in backlogs of work for the seventh straight month. This in turn resulted in further job creation, with employment rising at the fastest pace in just over five years.

Stronger increases in workforce numbers were signalled in Germany (54-month high) and Italy (eight-month high), while growth slowed in Spain and Ireland. Although staffing levels were unchanged in France, this halted a three-month run of job losses.

Average prices charged decreased again in December, with the rate of decline accelerating to the fastest since June. Meanwhile, cost pressures facing services firms remained subdued on the whole, with the rate of inflation in input prices up only slightly since November.

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CHINA SERVICES PMI FALLS TO 50.2

This is worrisome!

Caixin China Composite PMI™ data (which covers both manufacturing and services) signalled reduced business activity in China in December, with the headline Caixin Composite Output Index posting below the neutral 50.0 value at 49.4. This was down from 50.5 in November, and pointed to a marginal rate of reduction. Nonetheless, overall business activity has now fallen in four of the past five months.

December data pointed to divergent sector trends, with business activity rising further at service sector companies while a renewed contraction of output was seen at manufacturers. That said, the rate of service sector activity growth eased to a fractional pace, with the Caixin China General Services Business Activity Index posting just over the no-change 50.0 mark at 50.2 in December, down from 51.2 in the previous month. Furthermore, this was the second-lowest index reading since the series began in November 2005 (behind July 2014).

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Relatively subdued client demand was reported across both monitored sectors in December. This was highlighted by only a marginal increase in new work at service providers that was one of the weakest seen in the series history. New business meanwhile fell at manufacturing companies for the sixth month running and at a moderate pace. As a result, new orders declined for the second successive month at the composite level.

Despite slower growth in business activity, services companies continued to add to their payroll numbers in December. The rate of job creation was modest overall, and was generally linked by panellists to ongoing company expansion plans. Lower production requirements at goods producers led employment across the manufacturing sector to fall again in December, however. Furthermore, recruitment at services companies did not offset further job shedding in the goods-producing sector, and led composite employment to fall for the seventh month in a row, albeit marginally.

Backlogs of work were little-changed across China’s service sector in December, thereby ending a 10-month sequence of reduction. In contrast, the level of work-in-hand rose for the eighth successive month across the manufacturing sector. Moreover, the rate of accumulation was the quickest since February. Consequently, composite outstanding business increased slightly for the third month in a row.

Softer client demand and greater competition for new business contributed to further falls in average tariffs set by services companies and manufacturers in December. While manufacturers registered a sharp rate of discounting, only a marginal reduction was seen in selling prices set by service providers. Input costs also declined markedly at manufacturers in December. Meanwhile, cost inflation persisted across the service sector, albeit at a modest rate that was much slower than the series average.

Service sector companies in China expressed a relatively low level of optimism towards the 12-month business outlook in December. Furthermore, the degree of positive sentiment remained only slightly stronger than the record low seen in October.