Euro area: Composite PMI stable in February, but with increase in input prices

The euro area composite PMI remained stable in February at 50.2, slightly below consensus expectations (50.5). The Services PMI w as down to 50.7 (3-month low) from 51.3 while the manufacturing PMI continued to recover to 47.3 (9-month high) from 46.6, above consensus expectations. The details of the survey are not very encouraging with a contraction of new orders for the 9 th month in a row and a fall in employment after a stabilization in January. Regarding prices, input cost inflation has quickened in February to its fastest since April 2023, driven by the services sector, raising some eyebrows at the ECB. Fall in the services sector , while manufacturing activity continues to recover The index for the manufacturing PMI rose to 4 7 . 3 from 46.6 , (9-month high, see Chart 1 ) while the services sector retreated to 50.7 (3-month low) from 51.3 . Regarding t he details of the survey , t he index for “Future Output” remained unchanged around 58 while new orders fell slightly and remained in negative territory to 48.7 from 49.3 (see Chart 2 ). The “Employment” index, after rebounding in January , fell again in Febr uary (49. 3 after 49. 8 ). Germany slightly up, France sharply down On the country level , the message is mixed : the composite PMI continued to recover in Germany to 51 from 50.5 with manufacturing PMI (46.1) reaching its highest level in two years , although still in negative territory. In France, the composite PMI unexpectedly f e ll to 44.5 from 47.6 on the back of a sharp deterioration in the services sector (44.5 from 48.2, lowest level since September 2023), which is at odds with the Insee business survey released earlier this morning, which is pointing to a slight improvement. We tend to give more credit to Insee surveys due to a larger sample , better forecasting properties and upwards revisions in the French services PMIs in recent months. Based on past form, the level of the composite PMI reached in January -February would translate into sequential GDP growth of 0.1%qoq (see Chart 3 ). It is, however, noteworthy that actual GDP growth has on average over the last two years turned out better than what the PMI would have suggested and our official forecast for Q1 is +0.3% Q/Q . Today’s numbers are broadly consistent with our view that the euro area economy will moderately grow in Q1 after a slight positive growth in Q4:2024 (+0.1% Q/Q) . H owever, the overall growth performance is still rather sluggish , with downside risks to growth . The acceleration of i nput cost inflation is probably the worst news of today’s PMI, giving some ammunition to the ECB “hawks” especially after Ms Schnabel recently stated that the direction of travel is less clear. We think , however, that this will not dissuade the ECB from continuing to cut rates in March, but a pickup in services inflation – should it materialized - could lead the ECB to decide some “pause” before cutting rate s to neutral. We continue to expect the terminal rate of 2% to be reached in June.