First decline in four months
The flash Composite PMI in the eurozone showed a marginal decline to 54.3 in January from 54.4 in December, not quite matching expectations of a small increase. This was the first decrease in four months and suggests that economic momentum slowed toward the end of last year. Meanwhile, the business survey still suggests that real GDP growth firmed at 0.5 percent q-o-q in Q4 2016 (first graph below) and that growth started at a pretty healthy pace in 2017.
German service sector optimism stalled
The Manufacturing PMI increased to 55.1, a rise that was probably supported by growing optimism about global growth and especially about employment (almost at a seven-year high). The Service PMI, on the other hand, slipped to 53.6, where increasing inflation might begin to dampen optimism about future demand. Although the PMI price index fell marginally, it still points to potential for rising core inflation in the coming months (second graph below). Looking at the national PMIs, Germany’s Composite index decreased a bit to a still-robust 54.7 while the corresponding French index increased to 53.8, reaching a peak since mid-2011.
PMI could have peaked for now
The January PMI reading is in line with our view that a strong finish to 2016 implies a healthy economic starting point for 2017. Meanwhile, there is a risk that the PMI has peaked for now, and that higher inflation, less support from the EUR and increased political uncertainty (domestic and globally) will weigh on sentiment ahead.