Euro Zone Manufacturing Hits Highest Level Since April 2011; But Service Sector Refuses To Pick Up Momentum

Activity in the euro zone’s manufacturing sector rose to a 31-month high in December, beating expectations, but a third consecutive monthly decline in the services index did little to boost economic growth expectations in the region in the fourth quarter.

A preliminary reading of the manufacturing purchasing managers’ index, or PMI, published by Markit on Monday, rose to 52.7 in December, from 51.6 in November, and higher than the 51.9 number forecast by analysts. Service sector PMI fell to a four-month low of 51.0 in December, from 51.2 in November and lower than a 51.5 consensus figure. The composite output PMI, based on surveys of the manufacturing and service sectors, rose to a three-month high of 52.1 in December, from 51.7 in November, above a 51.9 expected reading.

“The rise in the PMI after two successive monthly falls is a big relief and puts the recovery back on track,” Chris Williamson, chief economist at Markit, said in a statement. “The upturn means that, over the final quarter, businesses saw the strongest growth since the first half of 2011, and have now enjoyed two consecutive quarters of growth.”

“On the downside, the PMI is signaling a mere 0.2% expansion of GDP in the fourth quarter, suggesting the recovery remains both weak and fragile,” Williamson added.

Manufacturing output and new orders rose for the sixth consecutive month, fueled by rising exports, but the service sector was hurt by lackluster demand within the euro zone.

Germany’s factory activity echoed the growth in the euro zone's manufacturing sector, with a PMI reading of 54.2 in December, up from 52.7 in the previous month. However, the German service sector PMI was at 54.0, down from 55.7 in November, while its composite PMI was pegged at 55.2 in December, down slightly from 55.4 in the previous month.

The French manufacturing sector contracted to 47.1 in December, down from 48.4 in November, while the country's service sector also stayed below the 50-point mark that separates expansion from contraction, at 47.4 in December, down from 48.0 in the previous month. Composite PMI fell to 47.0 in December, from 48.0 in November.

“It’s the unbalanced nature of the upturn among member states that is the most worrying. France looks increasingly like the new ‘sick man of Europe,’ as a second successive monthly contraction may translate into another quarterly decline in GDP, pushing the country back into a technical recession. In contrast, the December survey data round off a solid quarter of growth in Germany, in which GDP looks set to rise by 0.5%,” Williamson said.