The Eurozone's private sector growth surges to a ten-month peak, fueled by a robust services sector. Investor confidence remains high, yet further stock market gains depend on continued disinflation and potential ECB rate cuts, with escalating oil prices posing a threat to stability.
ADVERTISEMENTThe Eurozone economy is witnessing an upswing, with the latest business surveys indicating the fastest expansion in private sector activity in the last ten months, primarily driven by the services sector's robust growth.
According to the latest Eurozone Composite PMI data, activity expanded to 50.3 in March, the most robust level observed since May 2023. This revision from an initial estimate of 49.9 signifies a notable leap from February's 49.2, hinting at expansionary economic conditions.
Sectoral divergence: Services vs. manufacturing
However, a stark contrast between the health of the services and manufacturing sectors remains evident. The Eurozone Services PMI climbed to 51.5 from February's 50.2. On the other hand, manufacturing PMI lingered in contraction territory at 46.1 in March 2024, underscoring ongoing challenges in the sector.
March witnessed a sustained robust performance in the service sector job market, with employment levels increasing for the thirty-eighth consecutive month. Additionally, a notable deceleration in service sector input cost inflation to an eight-month low suggests easing price pressures, a welcome sign for the eurozone economy.
Optimism among businesses surged, reaching its most elevated level since the eve of Russia’s invasion of Ukraine in February 2022.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, offered an insightful analysis, stating, "the service sector in the eurozone is gradually finding its footing, fuelled by wage growth outpacing inflation, thus bolstering the purchasing power of households." He further elaborated, "individuals are more inclined to dine out, travel, and spend their money on other services. However, a full-fledged boom is not on the horizon."
Regional highlights: Italy and Spain lead service expansion
This optimistic outlook is mirrored across several eurozone countries, with Spain (55.3) and Italy (53.5) achieving 11-month highs in their Composite PMI Output Index, followed by Ireland (53.2). Despite France (48.3) and Germany (47.7) recording improvements, their figures still indicate contraction, though at a reduced pace.
Germany's service sector notably edged above the stagnation mark, with the Services PMI climbing to 50.1 in March from February's 48.3, a sign of modest recovery. Spain and Italy's service sectors exhibited strong expansion, with PMIs reaching 10 and 11-month highs, respectively.
Despite these positive developments, France's service sector continued to contract, marking a ten-month streak of decline, albeit at the weakest pace yet.
Dr. Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank, highlighted the upbeat sentiment among service providers in Italy, noting an increase in orders both domestically and internationally. "This buoyancy", he remarked, "positions the service sector as a key growth driver in the Italian economy, which has faced stagnant growth rates". The HCOB Nowcast predicts this momentum could nudge economic growth slightly above zero for the first quarter of 2024.
Can the European stock market rally continue
The eurozone's economic recovery continues, with services sector performance suggesting a potential upward revision of growth forecasts for the first half of 2024.
The European stock market, as reflected by the Euro Stoxx 50 index, is at its highest since November 2000. It has enjoyed nine consecutive weeks of gains, boasting a 12% increase since the beginning of the year. These figures are reflective of the confidence investors have in the economic recovery and the health of the corporate sector within the euro area.
Current market valuations do not raise particular concerns, with the price-to-earnings ratio hovering around 14 times, which aligns with the ten-year historical average. This suggests that the market is not overvalued by historical standards, allowing room for cautious optimism among investors.
The sustainability of this stock rally may well depend on the continuation of current trends, namely declining inflation rates, expectations of ECB rate cuts, and upward revisions in the profit estimates of European companies. These factors have provided the foundation for the ongoing optimism in the markets.
However, a principal risk to European equities currently stems from the generalised rise in commodity prices. Brent crude oil's ascent to $90 a barrel, marking a 16% increase since the year's start, could foreshadow a resurgence of inflation in Europe. Such a development may squeeze corporate profit margins and place the ECB under pressure regarding its interest rate decisions.
