Spain: Strong divergence of PMI readings in June

While manufacturing activity contracted in June, the service industry expanded at a stronger rate. If the weak industrial activity continues for much longer, it might spill over to the services industry, resulting in weaker overall growth in the second half of the year.

The PMI for the service sector increased to 53.6 in June from 52.8 in May. Higher levels of new orders supported the increased activity. These higher levels were predominately driven by domestic demand as new export orders declined quite sharply. Businesses also commented on economic and political uncertainties that impact foreign demand negatively. Higher activity did lead to more hiring, but employment growth was at the weakest level since October 2016. This implies that there is still enough capacity to deal with the workload. Moreover, backlog of work declined.

The situation in the manufacturing sector is quite the opposite. The PMI for the manufacturing sector entered contractionary territory in June, falling to 47.9 from the already low level of 50.1 in May. Lower volumes of new orders, both at home and abroad, lead to a drop in output. This also led to job cuts for the second consecutive month. The actual employment figures for the second quarter are not yet published, but chances are high that they are less positive compared to the first quarter.

If the weakness in the manufacturing sector continues for much longer and results in further job cuts, this could impact the services industry. Spanish manufacturers, however, are still optimistic, although the level is falling. We think that overall growth will be weaker in the second half of the year compared to the first half. For 2019 as a whole we think growth will still be decent. We forecast 2.2% growth in 2019 and 1.5% for 2020. Given these forecasts, Spain remains one of the fastest growing economies within the eurozone.