Eurozone PMI declines marginally but job growth and price pressures increase - ING

According to Bert Colijn, Senior Economist at ING, Eurozone businesses have started the year about as strong as they ended 2016 as the Eurozone Composite PMI decreased from 54.4 to 54.3 in January.

Key Quotes

“Indications of increased price pressures and strong job growth will slowly start to push core inflation up this year.”

“While the PMI edged slightly down in January, this should not be taken as a sign of weakness. As this reading is among the highest since 2011, momentum in the Eurozone economy remains fairly strong and economic growth is likely to continue at the same pace as it did in 4Q. We deem this reading consistent with our 1Q GDP growth estimate of around 0.4% QoQ. The weakening of the euro provides some tailwind here, as businesses report that stronger new orders in manufacturing are often coming from outside the Eurozone.”

“This PMI release also provides encouraging signs about the recovery of the job market. According to businesses, employment is rising at the fastest pace since 2008, which means that domestic demand will continue to be supported by people returning to jobs in the beginning of the year. Yesterday’s release of consumer confidence supports this view as it rose to a 21-month high in January.”

“Perhaps the most important news from this release is the fact that price pressures increased further in January. While some of this is still because of the oil price effect being priced through, businesses are also indicating more pricing power at the moment, which means that further price increases are likely in the months ahead. While the faster job growth and increased price pressures indicated by businesses do not mean that a boost in core inflation is imminent, they are necessary factors for inflation to move structurally higher. It seems unlikely that core inflation will structurally move to 1.5% or above this year, but some upward movement seems almost certain.”