While services for the sixth consecutive month revolved in contractionary territory, as virus-related restrictions continued to affect many businesses, manufacturing portrayed greater resilience, expanding for an eighth successive month and faster when compared to previous readings.

The most recent manufacturing PMI data were the latest illustration of Europe’s two-speed economic recovery.

In February, Eurozone manufacturing PMI was revised slightly higher to 57.9 – a three-year high, up from a preliminary estimate of 57.7 and significantly higher from January's 54.8 as operating conditions improved.

A reading above the 50 mark indicates an expansion compared to the previous month.

Output and new orders expanded by the most since last October’s recent peak, aided by the stronger exports – the main driver of all new order gains. Additionally, employment increased for the first time in two years. Delays and difficulties in sourcing inputs, this resulting from an upturn in global demand and transportation hurdles, led to the second-greatest deterioration in lead times (the latency between the initiation and completion of a process) since data were first available. On the price front, input cost inflation reached a near-decade high, while output prices rose at the strongest rate since April 2018.

Confidence in Eurozone’s future direction continued to strengthen, with optimism reaching its highest level since mid-2012.

Except for Greece, where the PMI slid back just below the 50 mark – representing a contraction, the pickup in manufacturing growth in February was broad-based, with largely all Eurozone members posting stronger PMI readings compared to January. Germany and the Netherlands continued to lead the way in terms of overall growth.

In February, Germany’s manufacturing PMI was revised slightly higher to 60.7 from 57.1 in January and broadly in-line with market expectations of 60.6. February’s reading marked the highest since January 2018 amid robust demand from abroad. Order book growth reaccelerated to the fastest since last October due to higher demand from Asia, particularly; China, the U.S., and Europe. Production levels, consequent to the increased demand, increased at the fastest rate for three months. Backlogs of work also marked an increase. Albeit the deterioration in supply-side conditions, manufacturers remained strongly optimistic.

France manufacturing PMI rose to 56.1 from 51.6 in January and above a preliminary estimate of 55. The latest reading pointed to the strongest expansion in the manufacturing sector since February 2018, amid faster increases in both output and new orders. The rate of workforce expansion was the strongest since November 2019.

The manufacturing PMI of Eurozone’s second-largest manufacturer after Germany; Italy, rose to 56.9 from 55.1 in the previous month, edging slightly lower from market expectations of 57.0. Both output and new orders expanded at the fastest pace since February 2018, aided by a strong increase in export orders.

As services remain burdened with restrictions to mitigate the spread of the coronavirus pandemic, manufacturing, showing greater resilience, remains the main driver behind Europe’s economic two-speed recovery. Although businesses have become more optimistic about activity in a year’s time thanks to vaccination developments, the near-term outlook remains somewhat uncertain. Unless the infection rate across Europe significantly subsides, pandemic-related activity restrictions shall remain, ultimately detrimental to the services sector and Eurozone’s economic recovery.

Certainly, the infection rate across Europe and the continuation of the vaccine roll-out shall prove crucial for; reviving the services sector – the drag on the Eurozone's economic recovery and manufacturing activity's continued resilience.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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