LONDON (Reuters) – Euro zone companies faced a tough start to 2024, with activity contracting again in January as demand continued to weaken and Red Sea tensions added to price pressures, a survey showed.
The outlook for manufacturing improved slightly but was still contracting, partly offset by a sharp decline in the European Union's main service sector.
The flash HCOB euro zone composite PMI compiled by S&P Global rose to 47.9 this month from 47.6 in December, just missing the 48.0 forecast in a Reuters poll but marking the eighth consecutive month it has remained below the 50 mark that separates growth from contraction.
“Today's data confirms our view that euro area economic weakness will continue for longer than most economists and the European Central Bank expect,” Commerzbank's Christoph Weil said.
Attacks in the Red Sea by Yemen's Iran-aligned Houthi rebels disrupted shipping and caused the euro zone's manufacturing PMI's delivery times index to fall sharply, below 50 for the first time in a year.
However, part of the increase in the manufacturing PMI was driven by a sharp drop in the deliveries index, which is inversely correlated with the headline number.
“Currently, problems with delivery times are occurring again due to the Red Sea, but this interpretation is certainly a bit misleading, since the decline in the delivery index is weighted positively in the overall index,” said Cyrus de la Rubia, chief economist at Hamburg Merchants Bank.
inflation
There were signs that inflation was gradually picking up, with both the input and output price indexes rising. The output price index rose to 54.2 from 53.8, the highest level since May last year.
This is likely to disappoint European Central Bank policymakers, who are eager to get inflation back to its 2% target.
“Inflation pressures remain quite high and will be a concern for ECB policymakers who are particularly focused on services inflation as an indicator of domestic price pressures,” said Bradley Saunders at Capital Economics.
The services PMI fell to 48.4, the lowest level in three months, from 48.8 in December, reversing expectations of a rise to 49.0 in a Reuters poll.
But optimism about next year improved, with the business expectations index jumping to 59.8 from 58.3, the last time it rose in May.
Manufacturing activity, which the PMI suggests has been contracting since July 2022, also fell this month but at a slower pace. The composite index rose to 46.6 from 44.4, well above the poll's forecast of 44.8.
An index measuring production, which is reflected in the composite PMI, also rose to 46.6 from 44.4.
Factories are shedding jobs again, but at a slower pace, suggesting they may have bottomed out. The employment index rose to 47.0 from 46.7.
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Reporting by Jonathan Cable; Editing by Christina Fincher
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