Eurozone: Global growth, Ukraine war and Covid risks

22 Nisan 2022

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April’s PMI surveys offer a first look at the health of major advanced economies at the start of the second quarter, including the US, UK, Eurozone, Japan and Australia. PMI data for March showed performance disparities between Asian and western economies as the US and UK benefited from the easing of COVID-19 restrictions while suffering from the effects of worsening supply constraints, particularly after the spread of the Omicron variant in mainland China. Amid persistent uncertainties brought about by both the prolongation of the Ukraine war and the worsening virus conditions in China, the April data should be watched carefully for lasting effects.

According to the April PMI data announced today; In Germany, the manufacturing PMI was 54.1 against the expected value of 54.5 (previously 56.9). In the service sector, an accelerated growth is observed with an index value of 57.9. In France, the manufacturing PMI was 55.4 against the expected value of 53.7 (previously 54.7). The service sector in France, on the other hand, increased to 58.8. While an index value of 55.3 is recorded in the manufacturing data of the Euro Zone, there is an acceleration to 57.7 in the services sector.

Except for the Euro Zone; The UK manufacturing PMI was 55.3 against the expected value of 54 (previously 55.2). The services sector index came in as 58.3, against the expectations of 60. With high prices and the associated rising cost of living, the effects of the Covid pandemic have reduced demand. The Ukraine war, the sanctions against Russia and the logistical problems caused by Brexit are causing losses in overseas trade. Manufacturing PMI in Japan was 53.4 (previously 54.1) and manufacturing PMI in Australia was 57.9 (formerly 57.7).

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Specifically, sub-indices such as price indicators, suppliers’ delivery times and future output, changes in the severity of supply problems and business confidence are significant; it also offers a first look at how developed countries have been impacted by the Ukraine war and quarantines in China so far in April. In mid-April, concerns regarding geopolitics, global macroeconomics and monetary policy are followed.

We saw western economies, especially the US, perform well in March, thanks to the easing of COVID-19 containment measures that boosted service performance. The shift in demand from goods to services due to the relaxation of epidemic restrictions explains this situation. Concerns about demand destruction as a result of increasing price pressures were also temporarily eased for countries such as the US and UK. Whether this will continue through April is more uncertain, especially as China’s worsening virus conditions raise supply concerns. Growth in the eurozone was stifled by the occupation of Ukraine, while mainland China fell steeply amid new lockdown measures. Meanwhile, rising prices remained prevalent, leading to a worsening inflation outlook, exacerbated in April by the dual effects of China’s new lockdowns and the Russia-Ukraine war, as well as rising commodity prices.

Therefore, the main determinant in the predictions regarding the economic outlook will be how resistant the demand will be in the face of these headwinds. Global service sectors are likely to be bolstered by further easing of travel restrictions, but higher prices could start to stifle demand. Service activity is experiencing its best momentum since the start of the pandemic escalation in the second quarter of 2020, rising only modestly in March from the Omicron-induced weakness seen at the start of the year. These data show that most of the demand growth from the pandemic opening has now subsided, pointing to weaker growth in the coming months.

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Euro Area economic activity also poses downside risks due to supply constraints, rising prices and spending behavior, which have been adversely affected by the ongoing war in Eastern Europe. It is too early to predict the end of the risks of war and there are no significant positive developments. It shows that production may enter into a slowdown, especially after April, due to both supply problems and the decrease in commodity demand.