European Union economy: Euro zone outlook brightens

Event

The flash composite purchasing managers’ index (PMI) for the euro zone rose to 48.2 in January 2013, up one point from December, driven by a strong rebound in Germany. Although the PMI remained below the 50-mark, indicating that activity continued to contract, the latest reading suggests that the euro zone may be on course to exit recession during this year.

Analysis

The latest batch of surveys carried out by Markit Economics point to a third consecutive monthly improvement in economic sentiment in January, with the PMI climbing further above its recent nadir of 45.7 reached in October 2012. The rate of decline in both the manufacturing and services sectors eased to the lowest pace for ten months at the start of 2013. Forward-looking indicators also point to further improvement, with the rates of decline of new orders slowing to 11-month lows in both manufacturing and services.

Conditions continue to vary considerably between member states. The increase in the January PMI was driven by a sharp improvement in economic conditions in the region’s largest economy, with the composite index for Germany jumping from 50.3 in December to 53.6, a 12-month high and a level consistent with fairly solid growth. The expansion in Germany was led by a strong performance in the service sector, but manufacturing also recorded an increase in production for the time since March 2012. By contrast, conditions deteriorated in France, the second-largest euro zone economy, with the French composite PMI falling by almost two points, to 42.7, its lowest level since March 2009. The pace of decline accelerated in both the manufacturing and services sectors. As for the rest of the zone, the PMIs point to continued contractions in output, albeit at a diminishing pace.

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