Monday, August 23, 2010

Eurozone recovery loses only slight momentum in August; Growth remained dependent on Germany and France

The Markit Flash Eurozone Composite Output Index, based on around 85% of usual monthly survey replies, fell to 56.1 in August, down from 56.7 in July, to signal only a slight loss in growth momentum over the month. The reading was still consistent with a robust rate of expansion and combined manufacturing and service sector output has now risen for thirteen consecutive months.

However, the solid outcome at the headline level masked worrying divergences between the national economies, as growth remained particularly dependent on the big-two of Germany and France. Eurozone manufacturers and service providers both reported increases in output during August, with manufacturing again leading the way. Although the pace of expansion eased in both sectors, their respective average growth rates so far in Q3 2010 are only slightly below those for Q2.

The deceleration in business activity growth was mirrored by an easing in the rate of expansion of new business. Manufacturers reported the faster increase in new orders, despite growth easing to the slowest of the year so far. Service providers saw a slight pick up in the rate of increase in new business. This suggested that growth again reflected improving domestic market conditions, especially given that manufacturing new export orders rose at the slowest pace since January and service sector business confidence hit a four-month high.

Output prices rose negligibly for the first time in four months, as higher factory gate prices offset a drop in service sector charges. However, the rate of inflation at manufacturers eased to its slowest in the current five-month period of increase, whereas the decline in service charges was the weakest since tariffs first fell in November 2008.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said: "The recovery lost only slight momentum compared to the bumper growth seen in the second quarter, with the flash Eurozone PMI for August consistent with gross domestic product for the region growing at a quarterly rate of 0.7%. However, the robust headline number masks some worrying developments.

"Of greatest concern, the upturn continued to be all-too dependent upon France and Germany. Growth in the rest of the euro area slowed to near stagnation, and services even contracted again as austerity measures bite. There is little evidence here to suggest that buoyant business conditions in the region's core nations are spilling over to the benefit of the periphery, meaning an increasing divergence in the euro area's two-speed recovery.

"Furthermore, manufacturing exports showed the smallest rise since January, meaning the stimulus to the recovery from global trade is waning as economic growth slows in important trading partners around the world. This could therefore lead to slower growth in the Eurozone's core in coming months."

The Eurozone PMI (Purchasing Managers' Index) is produced by Markit and is based on original survey data collected from a representative panel of around 4500 companies based in the euro area manufacturing and service sectors. The flash estimate is typically based on approximately 85%–90% of total PMI survey responses each month and is designed to provide an accurate advance indication of the final PMI data.

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