March PMIs for the UK and eurozone point to growing Middle East headwinds
As the first set of meaningful indicators to emerge since the outbreak of fighting, this update will be concerning for policymakers at both the ECB and BoE. Still, we think it is too early to conclude that rate hikes are the appropriate response, and the details of this morning’s reports offer some
A stagflationary theme emerged across European PMI prints in March, seeing slowing growth and rising inflation pressures, stemming from the ongoing conflict in the Middle East.
As the first set of meaningful indicators to emerge since the outbreak of fighting, this update will be concerning for policymakers at both the ECB and BoE. Still, we think it is too early to conclude that rate hikes are the appropriate response, and the details of this morning’s reports offer some pushback on concerns around inflationary passthrough. In any case, the narrative is negative for both sterling and the euro, seeing both currencies softening at the margin as traders digest this latest update.
Composite activity readings slipped across the board, while better-than-expected manufacturing prints look like front-loading rather than performance that is likely to be sustained
Looking at headline prints, the flash eurozone composite PMI slipped to 50.5 in March, down from 51.9 previously, while the UK composite dropped from 53.7 to 51.0.
Both readings undershot expectations, with that underperformance driven primarily by weaker-than-expected services activity across the eurozone and the UK. Granted, manufacturing prints delivered something of a surprise, delivering beats across all this morning’s reports. But this appears to have been driven by front-loading as firms attempt to avoid disruption stemming from conflict in the Middle East, a point noted in the German PMI report.
This implies that manufacturing resilience is unlikely to persist, putting a dampener on one of the few bright spots seen in March.
The details of the March reports reinforce headline activity indications, suggesting that disruption to supply chains, stemming from the conflict in the Middle East, is likely to be negative for growth. Broad falls across leading activity indicators and declining business confidence were general themes across countries. Similarly, firms indicated a sharp rise in costs this month, linked to rising prices paid for energy-related inputs. That said, in the eurozone, output charges have not risen in concert, with firms noting difficulties passing on higher costs to consumers.
In the UK, higher costs were met with yet another fall in employment. Both factors should give the ECB and BoE pause for thought when it comes to tightening policy.
In short, the data is concerning, but also unsurprising for the most part. An uptick in business costs, falling confidence, and headwinds to activity should have been the expected outcome of a negative energy shock. More data is needed to assess both the magnitude of the impact and the likely pass-through of higher energy costs to broader inflation. Absent that, we expect ratesetters to remain in wait-and-see mode, with the April PMIs likely to be a key watch ahead of the next round of monetary policy decisions. This, we think, is likely to help ensure that the FX reaction remains contained too. While stagflation is hardly currency positive, the scope for downside remains limited by a lack of outlook clarity.