Eurozone manufacturing PMI ticks up but remains in contraction territory

Activity in the eurozone manufacturing sector improved in January but remained in contraction territory, according to figures out on Monday.

Markit’s manufacturing purchasing managers’ index ticked up to 47.9 from 46.3 in December and a flash estimate of 47.8. It remained below the 50.0 level that separates contraction from expansion for the twelfth month in a row but marked the highest reading since April 2019.

Greece was the strongest-performing country, with growth reaching a five-month high, while Germany was again the weakest-performing country.

Chris Williamson, chief business economist at IHS Markit, said: "Eurozone manufacturing started 2020 with green shoots of recovery in sight. Most encouragingly, order books moved closer towards stabilisation, falling to the smallest extent since late 2018. With the survey indicating the steepest fall in warehouse stocks since September 2016, the new orders-to-inventory ratio, a key forward-looking indicator for factory production, surged to its highest for nearly one-and-a-half years.

"Expectations for output growth also leaped to the highest since August 2018 amid a broad-based improvement of sentiment across the region, with an especially important upturn in confidence seen in Germany.

"The improvement adds to our view that the eurozone economy could see growth strengthen in the coming months, meaning the ECB will hold off with any policy changes and instead focus on its strategic review."

Still, Williamson highlighted risks that could alter the brightening outlook, including the threat of a trade war escalation, Brexit-related disruptions and uncertainty over the impact of the coronavirus.

Tomas Dvorak, eurozone economist at Oxford Economics, said: "This is positive news and consistent with our view of gradual industrial stabilisation in the eurozone that we have been forecasting since late last year. Encouragingly, too, the manufacturing PMI increased across the board in all four of the largest eurozone member states.

"However, it’s important to note that the index remains well below the 50 mark that indicates no change showing that manufacturing activity continues to decline. The headline reading still has some way to go to return to any strength. Potential disruption to supply chains due to the Wuhan coronavirus outbreak poses an additional and new downside risk to manufacturing."