Euro area February flash PMI drops, weak global demand becoming drag on euro area confidence

The euro area flash composite PMI dropped in February to a 13 month low of 52.7. Manufacturing has again set off the brunt of the downward adjustment, with output dropping by 1.5 points to 51.9. Meanwhile, the services confidence also weakened to 53. New orders declined to a year low, depressing hiring intentions. Input prices dropped further due to weaker commodity prices, strengthening deflationary price pressures.

Meanwhile, outstanding business fell to an eight month low, whereas forward-looking components came in on the soft side. Business expectations dropped sharply by 3.5 points. The manufacturing sector scenario is more distressing, with all indices dropping in the month to close to one year low. Overall, the flash PMI implies that the weak global demand is dragging on euro area confidence. The PMI-based GDP indicator is standing at 0.3% q/q, lower than the forecast of 0.5%.

With the gloomy inflation outlook and the continued deflationary pressures, the flash PMI data strengthens the view that the ECB will be compelled to take action during its March meeting. Meanwhile, the German confidence fell again due to weaker manufacturing, whereas services drove down France's PMIs. Further moderation is expected in the manufacturing and services sectors in Italy Spain and Ireland.

The composite PMI for Germany was slightly lower than forecast and moderated further to a seven month low of 53.8 in February. The fall in the composite PMIs was mainly due to the manufacturing sector, where the output component dropped by 2.1 points to 51.4. Meanwhile, services rose to the historical high level of 55.1.

Weakness was broadly recorded through the manufacturing sector. New orders dropped considerably to 52 due to weaker external demand and moderating domestic orders. Meanwhile, hiring intentions fell to below 50 due to lower expected work inflows. On the contrary, services confidence remained strong at close to a 19 month high at 55.1, with stronger new businesses assisting the positive momentum.

Meanwhile, France's composite PMIs fell to a 13 month low of 49.8. The drop in the composite was due to weaker manufacturing output and services indexes. However, the manufacturing headline rose in the month with the help of slightly improved new orders, which are still below the 50-mark. On the contrary, services new business fell to a 15 month low. The services business expectations were slightly better, while hiring intentions rose further.