Eurozone manufacturing eases as expected in December

Eurozone manufacturing activity eased in December 2018, as expected, according to data released on Wednesday.

The IHS/Markit final eurozone manufacturing purchasing managers’ index slipped to 51.4 in December from 51.8 in November, in line with the flash estimate. Although extending the current run of expansion to five-and-a-half years, this was the lowest PMI reading since February 2016.

Confidence about output in a year’s time was the lowest recorded in the survey since the end of 2012, as continued worries over global trade, ongoing political uncertainties and tightening financial conditions took their toll.

In terms of countries, the main downside surprise came from Spain, where the PMI fell to 51.1 in December from 52.6 the month before, falling short of expectations for a reading of 52.4.

In Italy, the PMI edged up to 49.2 from 48.6 in November, while in France and Germany, the initial estimates were confirmed at 49.7 and 51.5, respectively. The contraction in France marked the second decline in the past three months and was partly blamed on the recent 'gilets jaunes' demonstrations.

Chris Williamson, chief business economist at IHS Markit, said: "A disappointing December rounds off a year in which a manufacturing boom faded away to near stagnation. The weakness of the recent survey data in fact raises the possibility that the goods producing sector could even act as a drag on the overall economy in the fourth quarter, representing a marked contrast to the growth surge seen this time last year. The last three months of 2018 saw manufacturers report the worst quarterly performance in terms of production since the second quarter of 2013.

"Worryingly, current production levels were achieved only by firms eating into backlogs of orders received in prior months and a dearth of new orders means capacity will be cut back in coming months unless demand revives. December saw a third consecutive monthly drop in new orders."

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said: "Overall, these data paint a picture of very sluggish growth conditions in EZ manufacturing. New orders for the industry as a whole fell for the third month running, and export demand weakened further, primarily thanks to a further slowdown in Germany. Output increased marginally, but with new orders falling, firms’ work backlogs are now declining; they fell at their fastest rate since November 2014. Employment growth remained solid, but this won’t last given the deterioration in new orders and output growth.

"Finally, inflation pressures are now showing signs of weakness, consistent with the recent crash in oil prices. Input price inflation, in particular, is now easing, which should help margins given that companies have been struggling to pass on the full extent of the recent increase in input price inflation from the combination of accelerating wages and higher energy prices."