Eurozone – modest recovery losing momentum?

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Economic and business survey data continue to report healthy trends in the UK's manufacturing sector, but the picture remains more variable across the rest of Europe.

The Eurozone economy has expanded in each of the past four quarters, a welcome turnaround after six consecutive quarters of contraction. But subdued growth of 0.2% (quarter on quarter) across the bloc's 18 economies in January-March 2014 marked a slowdown from the 0.3% expansion in the final quarter of 2013, with the key economies of Italy and particularly France displaying worrying signs of weakness.

Easing back

Prompted in part by a loss of momentum in the region's tentative economic recovery, last month the European Central Bank (ECB) unveiled another package of monetary loosening measures. Amid rising concerns over disinflation (headline inflation in the region eased to 0.5% in May, the eighth consecutive month in which it has been below 1%), the ECB announced further cuts in its main policy rates—including the introduction of a negative deposit rate, a first for a major global central bank—as well as targeted liquidity operations and a hint towards future private-sector asset purchases to support the economy.

Signs of faltering momentum are evident in the latest manufacturing PMI data for the Eurozone, which fell to a seven-month low of 51.8 in June, down from 52.2 in the previous month. While this still implies a modest expansion in industrial activity, the index has eased back steadily since the start of the year, with the average reading for Q2 coming in at 52.4 compared with 53.4 in Q1.

Eurozone manufacturing PMI(50 = no change)

Source: Markit

Looking at national trends, Ireland recorded the region's strongest PMI reading in June (55.3), while steadily improving sentiment in Spain (albeit from a low base) was reflected in the PMI rising to an 84-month high of 54.6. Elsewhere, however, the picture was more subdued. Although still signalling ongoing expansion, survey readings for Germany, Italy, Netherlands and Austria all slipped back in June, while further falls in the indices for Greece and France left both countries' manufacturing sectors in contractionary territory.

According to Markit, production across the Eurozone as a whole rose at its slowest pace in nine months. Growth in new orders eased back, amid a weakening trend in new export business and still subdued domestic market activity. Employment in the sector edged marginally higher, driven primarily by developments in Spain, whereas France reported a third successive month of job cuts.

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