The final Eurozone Manufacturing PMI data the other day revealed that the sector continues to contract sharply, despite a noticeable easing in the recent downtrend. New orders, in particular, fell sharply, with output also recording low levels – job losses also mount.
However, despite the bleak numbers, a rebound is notable. In particular, hard-hit Italy printed a three-month high 45.4 number, outpacing Germany’s 36.6. It hints that the European economies are slowly getting back on track from the coronavirus lockdowns, and the manufacturing output will increase once capacity runs close to pre-crisis levels.
European Manufacturing Bottomed-Out in April
The hope now for the European manufacturing sector is that it has bottomed-out in April. No one expected solid numbers with economies in lockdown mode, but everyone focused on how the recovery will take place – V-shape, L-shape, etc.
While still falling, production is declining at a slower rate. As economic activity already entered the last month of the quarter, the focus shifts now to what happens in the third quarter. As lockdowns begin to ease, the hope is that the European goods-producing sector may see some stabilization and, perhaps, return to growth in Q3.
An interesting development for the month of May took place on the price front. Deflationary pressures are evident across the European manufacturing sector as input costs fell for the 12th consecutive month.
What’s troubling here is the downtrend in the input costs that originated well ahead of the coronavirus pandemic. In other words, deflationary conditions existed before the pandemic, and the fall of the price of oil, together with the lockdowns, sent costs even lower.
Due to falling input costs and the challenging economic conditions, most firms decided to cut their output prices as well. Hence, deflation intensified during the lockdown months, showing the real threat to the ECB monetary policy actions.
We should mention here that the Eurozone economies are service-based ones, meaning that services occupy a bigger chunk in the overall GDP than manufacturing. Having said that, if the PMI Services for the major European economies confirm the deflationary pressures too, investors will focus on the ECB answer in terms of finding and setting the right monetary policy in the Euro area.
Headcounts are cut as a result of firms scaling back capacity. Weak demand affects not only output prices, but the number of employed people in the sector. If the sector does not manage to slow down the job losses, any recovery will be kept in check.