20th Mar 2018

Eurozone activity high after Brexit

  • Activity in August was driven by demands in services but manufacturing slowed down. (Photo: europa.eu)

Economic activity in the eurozone reached a seven-month high in August and British industry was supported by exports, despite uncertainties following the British vote to leave the EU, according to reports published on Tuesday (23 August).

For the eurozone, the composite Purchasing Managers' Index (PMI), an indicator of activity in manufacturing and services, rose to 53.3 in August from 53.2 in July and 53.1 in June, when the UK referendum took place.

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The index relies on analysis of output, new orders, deliveries, employment and prices to evaluate private sector economy. A PMI of 50 or more indicates a growth of activity, while a PMI under 50 indicates a contraction.

The August figures show that the eurozone "remains on a steady growth path in the third quarter, with no signs of the recovery being derailed by ‘Brexit’ uncertainty", said Chris Williamson, chief business economist at IHS Markit, the company that produces the PMI.

Growth remains fragile, however. Activity in August was driven by demand in services, but Markit found that "business expectations about the year ahead among service providers fell to its lowest since December 2014".

Meanwhile, manufacturing activity fell to a three-month low, and "although employment rose again in August, the rate of increase slowed to a three-month low", the report noted.

Germany once again was "a key engine of the eurozone’s overall expansion", with France "on course for its best quarter of growth so far this year".

ECB will 'do more'

“While the resilience of the PMI in August will add to the belief that the ECB [the European Central Bank] will see no need for any immediate further stimulus, the weakness of the overall pace of expansion and disappointing trends in hiring, order books, business optimism and prices all suggest that policymakers will keep the door open for more stimulus later in the year,” Chris Williamson said.

Last month, ECB president Mario Draghi said the institutions would be ready to use "all instruments" to maintain economic activity.

Ahead of the next meeting of the ECB's governing council on 8 September, executive board member Benoit Coeure said the ECB could "do more" if governments did not act.

“If there is not much taking place on the structural reform front, if there is not much taking place on the fiscal policy front ... then the ECB will do more,” he said at a conference in Geneva on Tuesday.

UK exports

In the UK, figures published by the Confederation of British Industry (CBI) showed that export orders for British manufacturing firms reached a two-year high in August.

The trend suggests that "the depreciation of sterling since the end of last year may be feeding through to stronger overseas demand", the CBI said.

The boost in exports also helped British manufacturing to maintain its level after the Brexit vote.

The CBI noted that 19 percent of businesses reported that total orders were above normal in August, compared with 18 percent in July, but 24 percent reported that orders were below normal.

"The pound’s weakness is a double-edged sword, as it benefits exporters but also pushes up costs and prices," the CBI said.

The business association added that British industry was waiting for "ambitious decisions" from the government to "secure the UK’s economic future as changes to trade, regulation and access to skills loom on the horizon".

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