Private sector growth in the euro area has reached a 10-month peak, supported by a strong services sector. Investor confidence remains high, but high oil prices pose a threat to stability, and further stock market gains depend on continued disinflation and a possible ECB rate cut.
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The euro area economy is showing signs of improvement, with the latest business survey showing private sector activity expanding at its fastest pace in 10 months, driven primarily by strong growth in the services sector.
According to the latest Eurozone composite PMI data, economic activity expanded to 50.3 in March, the strongest level since May 2023. This revision from the initial estimate of 49.9 represents a notable jump from February’s 49.2 and suggests economic expansion.
Sectoral Differences: Services vs. Manufacturing
However, there remains a clear contrast between the health of the services and manufacturing sectors. The Eurozone Services PMI stood at 51.5, up from 50.2 in February. On the other hand, the manufacturing PMI remained in contraction territory at 46.1 as of March 2024, highlighting the continued challenges in this sector.
The service sector job market remained strong in March, with employment levels increasing for the 38th consecutive month. Furthermore, a notable slowdown in service sector input cost inflation to an eight-month low suggests easing price pressures, a welcome sign for the euro area economy.
Optimism among businesses has soared, reaching its highest level since the eve of Russia’s invasion of Ukraine in February 2022.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, provides an insightful analysis, stating that “the euro area services sector is gradually gaining foothold, supported by above-inflation wage growth. “This has strengthened the purchasing power of households.” He added: “Individuals are increasingly spending money on dining out, travel and other services. However, a full-fledged boom is not on the horizon.”
Regional highlights: Italy and Spain lead service expansion
This optimistic outlook is also reflected in several euro area countries, with Spain (55.3) and Italy (53.5) achieving 11-month highs in the composite PMI output index, followed by Ireland (53.2). It continued. Despite France (48.3) and Germany (47.7) recording improvements, the figures still show contraction, albeit at a slower pace.
Germany’s services sector in particular was just above the stagnation mark, with the services PMI in March rising to 50.1 from 48.3 in February, showing signs of a gradual recovery. The services sectors in Spain and Italy showed strong expansion, with PMIs reaching 10- and 11-month highs, respectively.
Despite these positive developments, France’s services sector continued to contract, recording its 10th consecutive month of decline, albeit at the weakest pace ever.
Dr. Tariq Kamal Chowdhury, economist at Hamburg Commercial Bank, highlighted the positive mood among Italian service providers and noted the increase in domestic and international orders. “This boom will make the services sector a key growth driver for the Italian economy, which is facing stagnant growth rates,” he said. HCOB Nowcast predicts that this momentum could push economic growth slightly above zero in the first quarter of 2024.
Will the rise in European stock markets continue?
The euro area’s economic recovery continues, with services sector performance suggesting that growth forecasts for the first half of 2024 may be revised upward.
European stock markets are at their highest since November 2000, as reflected in the Euro Stoxx 50 index. It has risen for nine consecutive weeks and is up 12% year-to-date. These numbers reflect investors’ confidence in the euro area’s economic recovery and the health of the corporate sector.
Current market valuations do not raise any particular concerns, with the price-to-earnings ratio hovering around 14 times, in line with the average over the past 10 years. This suggests that the market is not overvalued by historical standards and there is room for cautious optimism for investors.
The sustainability of this stock rally may depend largely on whether current trends continue: lower inflation, expectations for ECB interest rate cuts, and upward revisions to European corporate profit forecasts. These factors are the basis for continued optimism in the market.
However, the main risk to European equities currently stems from the general rise in commodity prices. Brent crude oil prices have risen 16% since the start of the year to $90 a barrel, potentially foreshadowing a resurgence of inflation in Europe. Such a development could put pressure on corporate profit margins and put pressure on the ECB over its interest rate decisions.
