The first day of the month brings with it a raft of economic surveys. And this time the surveys were good, very good, with just one nagging doubt.Starting with the euro area, the latest manufacturing purchasing managers index (PMI) out today looked rather healthy. The index was up to 55.2. To put that in context, any reading over 50 is meant to be consistent with growth, and in fact, today’s reading stood at a 69-month high.
The index was pretty good across the board, with the exception of Greece, which saw its index fall to a 16-month low. With a reading of 46.6 for the Greek PMI, it appears that the country's manufacturing industry is still in recession. By contrast, the PMI for Austria rose to a 70-month high, but in Germany, France and Spain, the index is also at its highest level for a long time.
In the UK, the manufacturing PMI rose to a 32-month high, with a score of 55.9, mildly lower than the readings for Germany, Netherlands and Austria, but higher than the scores for the rest of the euro area countries.
Survey compiler IHT Markit said that “The [UK] domestic market was the prime source of new business wins in January. There was also a modest increase in new export orders, although the pace of expansion was noticeably slower than during the prior survey month. Where an increase in new work from overseas was reported, this was linked to improving global market conditions and the weak sterling exchange rate.”
When we turn to inflation, things look less rosy.
In the UK, input cost inflation surged to a survey record high and output charges also increased at one of the steepest rates in the series history.
In the euro area, cost inflation accelerated to a 68-month record, while average charges rose to the greatest extent in five-and-a-half years. Yesterday, saw the release of data indicating that euro area inflation increased to 1.8 per cent in January, from 1.1 per cent the month before, and just 0.6 per cent in November. But Jennifer McKeown, Chief European Economist at Capital Economics said that “the increase was mainly down to a rise in energy inflation.”
She added: “With rising energy prices and political uncertainty likely to cause GDP growth to slow this year, we expect core inflation to rise only modestly from the current low rate. Accordingly, we still see the [European Central] Bank buying €60bn worth of assets per month from April [meaning more QE] this year and then tapering its purchases gradually in 2018.”
Rob Dobson, Senior Economist at IHS Markit, said: “The question is whether increased cost inflationary pressure will act as a drag on manufacturing growth going forward. Companies seem fairly sanguine on this front, as a new index tracking business confidence signals optimism climbed to an eight-month high. Taken alongside robust output growth, rising new order inflows and job creation, all signs are pointing to a solid contribution to UK GDP from manufacturing during the opening quarter of 2017.”
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics was less positive, saying that the data "emphatically shows that the benefits to manufacturers from sterling’s depreciation remain far too modest to outweigh the costs for the rest of the economy in terms of high inflation.”
He said that while “weakness in export demand is not holding back manufacturers . . . manufacturers now are increasing prices sharply.”