Eurozone PMI held well in January despite the Omicron variant and higher costs Eurozone PMI held well in January despite the Omicron variant and higher costs Eurozone PMI held well in January despite the Omicron variant and higher costs

Eurozone PMI held well in January despite the Omicron variant and higher costs

CD
Christopher Dembik

Head of Macro Analysis

Summary:  The results of the monthly survey of purchasing power show the eurozone economy is resilient despite the spread of the new Omicron variant and higher costs. Expect GDP growth to be slightly weaker this quarter. But there is a bright side: manufacturing problems continue to ease and the German economy has rebounded in January after a weak end of 2021. The inflation headache remains but we doubt the European Central Bank (ECB) will act anytime soon to counter inflationary pressures. Over the past few days, several Governing Council members (Klaas Knot, Gabriel Makhlouf for instance) have clearly stated this is too premature to withdraw stimulus and hike interest rates.


Supported by an adequate fiscal policy, accommodative monetary policy and eased financial conditions, the eurozone economic recovery continues in early 2022 but at a slower pace than in 2021. Eurozone manufacturing is going from strength to strength. It improved further from 53.8 in December to 55.8 in January. Manufacturers mentioned two positive factors: less shortages for critical inputs and easing of transportation delays. From an inflation perspective this is positive because it reduces the upward pressure on producer price growth, though it does not disappear. Other factors are contributing to push inflation higher, such as energy costs and wages in some countries. There are pending issues too, for instance backlogs of work. It will certainly take months for businesses to realign production with demand, especially if demand remains strong. As the services sector was hit by restrictions implemented to contain the Omicron variant and the services PMI reached a 11-month low, the composite output PMI declined to 52.4 in January from 53.3 in the previous month and slightly below market expectations of 52.6. This is the second consecutive month of slowing growth. We consider growth still remains well-oriented in the eurozone. But there is a change of momentum. GDP growth is likely to be lower than expected this quarter. Some countries will surprise on the upside (Germany for instance) while others will disappoint (France).

Key details from the flash PMI report:

  • Price pressures remain a major issue with input cost and output charge inflation holding close to record highs. Markit notes that « rising costs remain a concern for businesses, with the survey data showing that input prices are continuing to rise sharply and on multiple fronts ». Expect higher prices to be passed on to consumers and subcontractors whenever possible. This might have a negative impact on consumption. It could ultimately force the European Central Bank to adopt a more hawkish stance too.

  • The Omicron variant is leaving a mark on the services sector, especially in countries where tougher restrictions have been introduced (i.e. the Netherlands, curfew in Catalonia etc.). But there is growing evidence that businesses and consumers alike are learning to cope with Covid and associated restrictions. Hopefully, we are getting close to the point where the virus will become endemic and will have a much less impact on the economy. On January 23, the WHO Europe Director, Hans Kluge acknowledged « it is plausible the region is moving towards a kind of pandemic endgame » as the new variant could infect 60% of Europeans by March (which is close to the level of herd immunity).

  • Whereas the French composite PMI softened to a 9-month low of 52.7 as the services sector saw a marked slowdown due to weaker demand and staff shortages, the situation in Germany improved unexpectedly with a strong rise in the manufacturing sector from 57.4 in December to 60.5 in January. Supply bottlenecks showed further signs of easing, which resulted in a higher than expected manufacturing PMI. This seems to indicate the German economy has rebounded in January after a weak end of 2021.

  • The UK flash composite PMI slipped to 53.4 in January from 53.6 in December. This is much lower than expected (55.0). Consumer-facing businesses were hit by the spread of the variant. But the main issue is related to higher cost, like in the rest of Europe. The gauges of costs paid and prices charged by services companies – watched closely by the Bank of England (BoE) – increased in January again after easing back in December from recent all-time highs. We forecast the BoE will hike interest rates at least three times this year, in February, May and August in order to contain inflationary pressures. Each hike is likely to be 25 basis points. 
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.