Europe's industrial gloom: Economists predict a slow climb from economic valley

At the start of the year, PMI indicators revealed the industrial sector's mood, providing data for the principal economies of Europe and China. Regrettably, the information presents more challenges than hopeful surprises. However, economists maintain optimism for an impending economic resurgence.

The Industrial PMI index for the euro area saw a meager increase of 0.2 points to 44.4 points in December, up from 44.2 points in November. A score below 50 signifies an industrial recession, while scores above it suggest rising activity. Thus, the current standing is relatively low, depicting a disheartening state of the European economy.

December saw a continual decline both in industrial activity and demand for industrial products as per the PMI report. Dr. Cyrus De La Rubia, Chief Economist at Hamburg Commercial Bank, describes the production condition in December across the euro area's four major economies as "troubling".

"Spain is the least affected – its PMI indicates an economic slowdown, but the intensity is lower than in Italy, where industry is shrinking more slowly than in Germany. France, unfortunately, fares worst in this comparison," he explains.

In fact, the French industry is signalling a significant contraction in production and potential workforce reductions. The report reveals an imminent threat of rising unemployment.

Manufacturers in France are pessimistic about their prospects for 2024. The possibility of decreasing economic activity and further weakening of demand are the primary reasons for their persistent negativity. This negative outlook is also reflected in the PMI employment data, which indicates ongoing workforce reductions by manufacturers, heightening the probability of a rise in the official unemployment rate.

Germany is also struggling with ineffective industry. Cyrus De La Rubia likens the situation in German industry to a traveler who inadvertently wandered into a valley, saying, "Visibility of progress in finding a way out of this situation exists, but it remains uncertain how close we are to finding the correct path," assures the economist.

While Poland also faced issues, it coped better in this respect.

Special attention should be given to the data’s structure, which revealed a renewed acceleration in the overall decline in new orders, inclusive of new export orders. These lower orders reflected a quickening decline in current production. As in preceding months, companies, in December, attempted to offset weaker demand by clearing production backlogs, which again accelerated last month - explain economists at Credit Agricole.

Monika Kurtek, Chief Economist at Pocztowy Bank, suggests that despite December's PMI reading being weaker than market expectations, the fourth quarter average was 46.9 points, outperforming the scores of the second and third quarters. She maintains that the situation in the Polish industry improved towards the year end.

"This permits an estimate of the GDP growth rate in the fourth quarter around 1.5-2% year on year. Even though industry sentiment declined in December compared to November, it remains among the most positive during the last two years. This provides solid grounds for anticipating further economic acceleration in the coming quarters of this year," predicts the economist.

Investors were also briefed on China's PMI readings. However, they provided contradictory signals as PKO BP experts point out.

The Caixin PMI index, illustrating the condition of the SME sector, increased to 50.8 points from 50.7 points a month earlier, contrary to the anticipated decrease to 50.3 points. The "official" PMI index, focused on larger, state-owned companies, unfortunately, tumbled to 49 points from 49.4 points a month earlier. The market expected an increase to 49.6 points. For three months, the index has been below the neutral threshold of 50 points. In December, indices of new orders (including export) and companies' purchasing activity measures declined. The price indices also fell, suggesting a deepening of producer price deflation. Negative evaluations of employment prospects persisted (sub-index below 50 points).

"In his New Year's speech, Xi Jinping promised actions to bolster economic growth and job creation rate, underlining China's status as an industrial power. He also conceded that some companies currently face challenges, and that finding work and satisfying basic life needs have become harder," - say analysts from the Polish bank, citing the Chinese leader's words.