Euro area’s February manufacturing PMI drops on weak external demand

February final manufacturing PMI of euro area was revised up marginally from the flash reading to 51.2; however, it still dropped from January's final print to a 12 month low in February. Even if output and new orders were revised upwards marginally from the preliminary estimate, they dropped significantly over the month amidst weak external demand and subdued domestic pressure. This does not bode well for the currency bloc's industrial production in the coming months. The industrial carry-over going into Q1 2016 is already considerably negative at -0.9% q/q.

Moreover, the fall in manufacturing confidence was broad-based in terms of nations, except France, which rebounded slightly more than the 50-mark. In Germany, confidence dropped to a 15-month low despite the PMI being revised upwards to 50.5. This is because of weak domestic and external demands, pushing hiring intentions below the 50-mark for the first time since August 2014. The disappointing readings break hopes for a considerable recovery in the country's industrial sector in the first quarter of 2016.

Meanwhile, manufacturing activity in Italy also looks on the edge to lose momentum as confidence declined to a 12-month low at 52.2. Economic uncertainty has been named as the main factor for the fall. Spain's PMIs also declined to 54.1, but continues to be above the historical average. New orders fell sharply after posting a strong growth in January, while increased inventories and strong capital goods output gave positive signals.

"Overall, looking through monthly volatility, the Spanish manufacturing sector remained well oriented, in line with our view that growth should only slowdown a little in Q1 (from 0.8% q/q in Q4 15 to 0.54% q/q in Q1 16)", says Barclays.