Today’s flash PMIs for June out of the eurozone and UK highlighted a consistent theme: momentum in economic activity from the removal of health restrictions at the start of the year is fading and inflation pressures are weighing on order growth and sentiment.
While the eurozone PMI figures showed a more pronounced downturn, this is largely due to the fact that their economies reopened later this year than the UK. Thus, the stabilisation in the UK PMIs in June may be a useful guide for eurozone economists. However, despite the UK PMIs stabilising following May’s dramatic downturn, evidence from the report highlights an abundance of worrying signs for the UK economic outlook remain.
- Composite PMI unchanged at 53.1
- Services PMI unchanged at 53.4
- Manufacturing PMI at 23-month low of 53.4 (prev 54.6)
- Composite PMI at 6-month low of 51.3 (prev 53.7)
- Services PMI at 5-month low of 52.4 (prev 55.0)
- Manufacturing PMI at 23-month low of 52.0 (prev 54.8)
- Composite PMI at 5-month low of 52.8 (prev 57.0)
- Services PMI at 5-month low of 54.4 (prev 58.3)
- Manufacturing PMI at 19-month low of 51.0 (prev 54.6).
Starting with the eurozone PMIs, the French data set the tone early on. Released just 15 minutes prior to the German data, the French PMIs highlighted how the golden child of the eurozone growth outlook was coming under increased pressure from fading reopening effects and higher inflation conditions. Excluding the start of the year when the economy was subject to health restrictions, the French economy recorded its slowest rate of growth in private sector output since April 2021.
Businesses attributed this to a weaker demand outlook, especially in the manufacturing sector, which has only been exacerbated by the high inflation environment.
These fears over price pressures drove business optimism lower in France in June, with the confidence measure now sitting at a 19-month low. Similar themes were experienced in Germany. Sitting at just 51.3, the composite index highlighted a sustained loss of economic momentum and the lowest level of private sector output since December 2021. At a 23-month low, the manufacturing index was propped up by a backlog of work which masked the weaker trend of new business. New orders in goods and services fell for the first time this year and by the largest amount since June 2020, but most of this was driven by the sharpest decline in manufacturing orders in the past two years.
With economic momentum fading in the eurozone’s two largest economies, and a contraction in new orders suggesting that growth is only going to slow further in the coming months, today’s PMI data suggests that a recession is highly likely in the eurozone in the second half of this year.
In response to this morning’s data, German bund yields nosedived, while pricing of the ECB’s policy path became substantially more dovish: markets priced out around 15bp of ECB hikes by year-end in both overnight index swaps and 3-month EURIBOR futures.
With growth headwinds increasing and broadening across sectors, we believe the ECB will have to act more aggressively in a shorter window as relaying rate hikes during a more mature economic slowdown will be difficult to relay. We expect the ECB’s communications to centre around a 50bp hike as early as the July meeting, with the decision communicated with more dovish forward guidance.
Following the sharp downturn in the eurozone PMIs, attention then turned to the UK services PMI released at 09:30 BST, which fell dramatically back in May and sparked concerns that the BoE would struggle to continue hiking rates in H2. With the UK economy reopening earlier than most eurozone nations following the Omicron wave, this month’s PMIs were seen as more reflective of underlying economic growth conditions. While the stabilisation in the headline PMI numbers helped to soothe fears of a sharper economic slowdown, the underlying data suggests the UK economy is about to hit a turning point.
Similar to the eurozone, new order volumes in the UK dropped from 53.8 in May to 50.8 in June – the weakest rate of new order growth since March 2021.
Additionally, concerns about persistently high inflation and impending cutbacks in discretionary spending contributed to another drop in output growth projections. The business expectations index fell by 4.6 points in June, the largest one-month decline since the start of the pandemic. The only positive to take from the underlying data was that employment growth remained strong, particularly in the services sector. However, even then this can be viewed in the context of businesses failing to replace voluntary leavers in previous months. Thus, increased hiring was merely a replacement of workers as opposed to an expansion of production capacity.
In response to the PMI data, UK assets outperformed eurozone counterparts. Gilt yields rose from daily lows, while expectations of the Bank of England’s hiking path remained stable, albeit at levels we still believe as prime for a dovish repricing. The pound continued to retrace earlier losses against the dollar, while the divergence in the PMI data sent GBPEUR around half a percentage point higher.
GBPEUR pops higher after UK PMIs outperform eurozone counterparts
Simon Harvey, Head of FX Analysis