The flash PMIs for July point to a continued recovery in the Euro-area economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-area economy.
The Euro-area composite output PMI advanced from 52.8 to 54.0, equalling the 3-year high seen in April. The improvement was driven almost solely by the services sector, which saw confidence rise to a 38-month high. The modest advance in the manufacturing component could easily have been larger, based on how manufacturing confidence has developed recently in e.g. China and the US.
On a country level, only numbers from the two largest Euro-area economies were released at this point, but on average, the composite PMI improved also outside Germany and France, although somewhat less.
The data was certainly welcome amidst all the geopolitical concerns and worries these events could deliver another shock to the Euro-area economy. However, the recent numbers are unlikely to illustrate fully the recent escalation in the Ukrainian/Russian crisis, and the effect of this crisis has certainly not been felt fully yet. On the other hand, the numbers will not really reflect the recent weakening of the euro either, which should be supportive of confidence.
The better PMI data point around 0.4% q/q growth in the Euro-area economy, which is not bad, though not stellar either (while actual Q2 GDP growth was likely clearly weaker) . More importantly, such growth will not be sufficient to create inflation pressures any time soon, so the focus will remain on the low inflation readings for now.
The data supports a small rebound higher in German bond yields as well as the euro, while intra-Euro-area spread narrowing should continue. However, the main focus in the Euro-area remains on the subdued inflation readings, and a clearer change in the inflation outlook would likely be needed for a more sizable move higher in yields.
German economy going strong again
The German numbers were solid: the composite output PMI climbed from 54.0 to 55.9, close to the 3-year high of 56.4 seen in February. Sentiment improved in both the manufacturing as well as the services sector, though the services sector was the main driver behind the improvement. The numbers imply the German economy continues to show resilience and is doing much better than e.g. the recent hard data from the industrial sector would suggest.
French competitiveness issues still causing worries
The French composite output PMI rebounded from 48.1 to 49.4, roughly offsetting the fall seen in June. The better composite number was fully driven by better sentiment in the services sector, but the difference between the two largest Euro-area economies remains striking (German composite PMI at 55.9).
More worryingly, the French manufacturing PMI deteriorated further, from 48.2 to 47.6, the lowest seen this year. The weak numbers illustrate that the French economy continues to face competitiveness issues and are the latest reminder for President Hollande that he needs to implement sizable reforms to the French economy.
Nordea