Euro area: Composite PMI slightly improved in March

The euro area composite PMI slightly improved in March, to 50.4 (7-month high) from 50.2, but below consensus expectations (50.7). The recovery was led by the manufacturing sector while services disappointed (see chart 1 ). The composition of the report is mixed. On the one hand, t he index for “Future Output” declined to 5 6.9 from 5 8.0 while the “New Orders” index remained broadly unchanged around 49 (see c hart 2 ). On the other hand, t he “Employment” index slightly improved to 50.1 from 49.3. But t he most welcome news f or the ECB is that the rate of input cost inflation softened in March, ending a five-month sequence in which the pace of increase had quickened . Manufacturing up, but services disappointed The March recovery was led by the m anufacturing sector which improved further to 48.7 (34 month high) from 47.6 , above expectations , with an upturn in the German manufacturing production . The German manufacturing output index improved to 52.1 from 48.9, a 36-month high and the first increase in almost two years. The French manufacturing PMI output also improved in March, to 48.8 from 44.5, a 34-month high. Despite some persistent weakness some companies commented on a relative improvement in sales and new product launches . The euro area services PMI fell short of expectations to 50.4 from 50.6 and vs. 51.1 expected. German service PMIs disappointed (50.2 from 51.1) on the back of a continued lack of incoming new work and a new decline in employment, pointing to signs of low-capacity utilization. French services PMI recovered somewhat, but from low levels (46.6 from 45.3). Easing in input prices inflation paves the way for a new ECB rate cut in April Today’s numbers are broadly consistent with our view that the euro area economy will continue to grow moderately at the beginning of this year , at a broadly similar pace than in Q4 (+0.2% Q/Q) . Based on past form, the level of the composite PMI in Q1 would translate into sequential GDP growth of 0.1 % Q/Q (see c hart 3 ). H owever, the actual GDP growth has on average over the last two years turned out better than what the PMI would have suggested. We think t he slight pickup in momentum – in a context of huge uncertainties, including downside risks due to US tariffs - will not dissuade the ECB from continuing to cut , especially as input cost inflation eased . We continue to expect a 25-bps rate cut in April and another one in June (market expectations see 60% of a 25-bps rate cut in April ) .