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Weak PMI data in December casts doubts on UK, eurozone economic revival in 2020

Economic indicators released Dec. 16 by IHS Markit showed that private-sector output in the U.K. fell further in contraction territory this month while Germany and the wider eurozone failed to log an improvement, raising doubts on the prospects of a recovery in the coming year.

The U.K.

In December, U.K. private-sector output unexpectedly contracted for the second month in a row, sparking fears about a slight economic contraction in the fourth quarter. IHS Markit's U.K. flash Composite Output Index fell to 48.5 from 49.3 in November, signaling the fastest pace of decline since July 2016.

The flash Manufacturing Purchasing Managers Index dropped to 47.4 from 48.9, as manufacturing production registered its steepest fall since July 2012. The flash Services Business Activity Index edged down to 49.0 from 49.3. Readings below 50.0 indicate contraction.

The latest survey data from IHS Markit signals a fragile start to 2020 for the U.K. economy, which is unlikely to be on the verge of a sharp turnaround despite the significant election victory of Prime Minister Boris Johnson's Conservative Party, according to James Smith, developed markets economist at ING. Johnson's election victory has eased uncertainty over a smooth Brexit scenario in January 2020.

"We aren't convinced that next year will see a full investment revival," Smith wrote, noting that both manufacturing and services indicators remain in contraction territory. "The latest data suggests the economic case for investment is not currently compelling."

Heading into the New Year, Smith said the focus will quickly turn to the Brexit transition period and the possibility of an extension to its end-date of Dec. 31, 2020. "An extension is ultimately likely in our view, but until this is agreed, the lingering uncertainty could continue to cap on investment appetite in the early stages of the new year," he added.

Germany

The flash German Composite Output Index remained unchanged at 49.4 in December, missing analysts' expectations for a rebound out of contraction territory. The flash Manufacturing PMI fell to 43.4 from a five-month high of 44.1 in November, as manufacturing output declined at a faster pace. The flash Services PMI Activity Index rose to a four-month high of 52.0 from 51.7.

In the manufacturing sector, new orders fell for the sixth consecutive month, and factory employment dropped at the second-fastest rate for nearly 10 years, IHS Markit said.

Overall, fourth-quarter data for the German economy offers "no sign that the country is out of the doldrums yet," Oxford Economics said in a note.

Businesses' expectations regarding output in a year's time improved to a six-month high due to stronger optimism in the service sector, IHS Markit said. Meanwhile, sentiment among manufacturers slightly deteriorated, with an even split between the number of goods manufacturers anticipating a fall in output and those expecting an increase.

Eurozone

Germany continues to drag on wider eurozone growth, according to Nordea Markets Chief Analyst Anders Svendsen and Analyst Inge Klaver, who said that the December PMIs for the euro area confirm that region is in a deep manufacturing recession.

The flash Composite PMI Output Index remained unchanged month over month at 50.6 in December, ending a fourth quarter in which private-sector output grew at its weakest pace since the second half of 2013, IHS Markit said.

Manufacturing output dropped at the fastest rate since October 2012, as the relevant PMI fell to 45.9 from 47.4, marking the 11th consecutive monthly drop. The eurozone services PMI improved to 52.4 from 51.9.

"The euro area industrial recession is rather deep-rooted and does not bode well for the new year," Svendsen and Klaver said in a note, warning that both Brexit and issues regarding U.S.-China trade relations will still linger in 2020 despite recent positive developments.