The eurozone’s slump in manufacturing activity eased in February, defying expectations that it would contract further due to the coronavirus outbreak and lessening the chances of some of the bloc’s economies facing a technical recession.

The flash manufacturing purchasing managers’ index for the euro area rose to 49.1 in February, up from 47.9 in the previous month and above analysts’ expectations of 47.5. While this is still below the 50 mark, indicating a majority of businesses reported a contraction in activity, it is the highest value since February 2019.

Meanwhile the single currency area’s dominant services sector remained resilient, pushing overall business activity to a six-month high. The services sector PMI reading rose to 52.8 in February from 52.5 in the previous month, which pushed the composite index marginally up to 51.6.

Chris Williamson, chief business economist at IHS Markit, said the bloc’s economy had picked up momentum “despite many companies having been disrupted in various ways by the coronavirus”. The impact of the disease had caused supply problems and showed some signs of hitting travel and tourism numbers, he said. 

The data are consistent with economic output rising at a quarterly rate of 0.1 per cent in the first quarter, unchanged from that of the last quarter in 2019, according to the consultancy Capital Economics.

Overall the PMI data “provide some reassurance that the impact of the coronavirus on the eurozone economy has so far proved limited”, said Jessica Hinds, Europe economist at Capital Economics. “But the big picture is that the economy is still lacking momentum.” 

The euro rose following the release of the figures, to trade 0.3 per cent higher at $1.081, while European stocks marginally recovered some of their earlier losses. 

“To the extent that markets and forecasters were coming into this release with fears of a virus hit, those fears have been convincingly dispelled, at least for now,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

The improvement in manufacturing activity was largely driven by the easing of a prolonged slump in Germany, the region’s largest industrial producer and the eurozone country most economically exposed to China.

Germany’s improved flash manufacturing PMI reading of 47.8, up from 45.3 in the previous month, surprised investors who had expected the country to take a more significant hit from the coronavirus outbreak.

Line chart of Purchasing managers' indices showing The slump in German manufacturing activity has eased

“The small increase in the eurozone composite PMI was a big surprise. This should at least temporarily put to bed worries over an imminent recession in Europe,” said Oliver Rakau, chief German economist at Oxford Economics. Still, he warned that “the fragility of global supply chains means that even small disruptions in China could spell large repercussions for Europe down the line”.

However, factory activity deteriorated in France, with the flash manufacturing PMI dropping more than expected to 49.7 in February, from 51.1 in the previous month. This reflected a production dip in aeroplane production and supply chain issues as a result of coronavirus.

Economists also noticed that while the headline figures were strong, the details painted a more negative picture. The slower pace of decline in German factory activity was largely the result of an increase in new domestic orders, while foreign orders fell at their fastest rate for three months.

Line chart of Share of national goods exports, rolling 12-month sum, % showing Germany is most reliant on exports to China

German goods producers reported “a slump in both exports and sentiment, linked to the impact of the coronavirus on activity in China and the wider region”, according to the IHS Markit.

A large part of the improvement in German factory activity resulted from a slowdown in the sub-index that tracks delivery time, a trend usually associated with an improvement in overall activity as firms struggle to keep up with the pace of customers’ orders.

However, in this case, participants in the survey linked the slower delivery times to the coronavirus-related disruption in China — so the slowdown represents a negative indication of the economic outlook, rather than a positive one. 

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