Good but not perfect: European and UK PMIs beat expectations

Manufacturing and services PMIs were released yesterday in Europe. These are the preliminary numbers for November and, while growth is still weak and below trend, the numbers were better than expected and show increasing signs that the manufacturing sector might be finding a bottom. 

Germany in particular saw a large jump in the sector’s reading from 40.8 to 42.3, which continues to build on the recovery from the July lows of 38.8. Expectations for future growth remain subdued but are off the lows seen in June, with the pattern similar for inflows of ‘new work’ and ‘manufacturing production’. Employment is suffering as a result, with manufacturing workforce numbers falling at the fastest pace in over three years. This should have consequences for wages, in time. Although France’s manufacturing PMI at 42.6 was well below expectations, the Eurozone manufacturing PMI came above expectations at 43.8. 

Services PMI was slightly better than expected in Germany, while the opposite was true in France. These dynamics resulted in a Eurozone services PMI number of 48.2, marginally better than the 48.1 the market expected and higher than last month’s 47.8. We also note services companies showed a mild increase in employment, which was not enough to offset the reduction in manufacturing. As a result, overall companies in the Eurozone reported to have lowered their staff levels for the first time since early 2021.

The UK also exhibited figures that outpaced market consensus. Manufacturing PMI came at 46.7, well off the 43.0 lows of last August, while services PMI at 50.5 was higher than forecasts and last month’s 49.5. There was, consequently, a stabilisation in the composite number, which at 50.1, returned to expansionary territory after a three-month hiatus. Employment was flat, while rising confidence in the services sector translated into a bounce in business activity expectations from a 10-month low.

Finally, regarding inflation, there was a slight increase in cost pressures in particular in the services sector both in the Eurozone and the UK. These have to do with companies needing to pass on wage increases to end customers. It was also highlighted in the reports that these cost pressures might mean that the downward trajectory in inflation might not progress in a straight line.

We think these PMI numbers are reasonably good news, even if they are not perfect. The ECB and the BoE would have liked to have seen further evidence of wage inflation moderating. At the moment it is fair to say that labour markets are easing at the margin but remain tight. This is not exactly surprising considering the lagging nature of monetary policy cycles and of wages (particularly in the Eurozone where unions have a bigger say than in the UK and elsewhere). But, nevertheless, it is hard to see central banks changing their hawkish rhetoric until we see clearer signs of wage pressures easing. 

On the other hand, central banks hoped the severe tightening of financial conditions would cool aggregated demand but without causing a steep recession. So far, so good on this front. If these mild recoveries continue in the coming months, thereby confirming that we have already seen cyclical bottoms in both PMI surveys, then central banks can pat themselves on the back. Spreads should be well supported in such a scenario, which given how high yields are now, should in turn bode well for total returns in fixed income in the coming quarters.