- The eurozone composite PMI slipped further in September, taking it to a 9-month low…
- …but there are a number of reasons to expect a moderate recovery in coming quarters
- US manufacturing expansion continues at a rapid pace in September
Eurozone PMIs slip further…
The eurozone PMI surveys slipped a bit further in September. The composite whole economy output index fell to 52.3 from 52.5 in August, which was a little below the consensus forecast of 52.5. Both the manufacturing PMI (to 50.5 from 50.7) and the services business activity index (to 52.8 from 53.1) edged down. The decline in the composite index marked the second consecutive monthly drop and took it to the lowest level this year. Nevertheless, the level of the index does still remain consistent with a modest pace of expansion. The survey providers – Markit – said the index signalled economic growth of around 0.3% qoq in the third quarter. This looks to be roughly in line with the graphical relationship (see chart). This would be better than the stagnation recorded in the official GDP figures in Q2.
…but a number of factors point to improvement
The components of the PMI surveys did not provide much encouragement. New orders came down further in both the manufacturing and services sectors, while the orders-to-stocks ratio in the manufacturing sector also deteriorated. However, there are a number of fundamental factors, which point to better growth prospects in the coming months. First of all, the euro exchange rate is coming down. This is important because the past strength of the euro has been a major drag on economic growth as well as inflation. Indeed, the contribution of net exports to GDP declined by almost one percentage point around the period of euro strength. So the recent decline could well prove to be a major positive. Second, exports will also likely be supported by stronger global economic growth more widely. In particular, the US economy is picking up strongly (see below) and historically, the eurozone has tended to follow with a lag (though the recoveries have tended to be more moderate). Third, the bank lending channel – so crucial in financing the eurozone private sector – appears to be thawing. Demand for loans has started to rise, while lending conditions have eased. The measures the ECB is taking should encourage a further improvement. Finally, there are early signs that tensions related to the Ukraine crisis are softening. Overall, we expect eurozone GDP growth rates to gradually improve going forward.
An encouraging US flash manufacturing PMI
September’s US Markit flash PMI was unchanged at 57.9, leaving it at a four year high. The components of the flash PMI show that production fell to 59.9 this month from 60.7 in August, while the employment index rebounded to 56.6 from 54.6, the highest level since March 2012. The PMI has been pretty strong in the recent months and many other manufacturing indicators have been upbeat lately. Indeed, the various regional manufacturing indices have been showing a positive trend, particularly the Empire State Manufacturing Survey, which rebounded. Industrial production, the hard data for manufacturing activity, has been somewhat less upbeat than the manufacturing surveys. Industrial production declined a bit in August. However, this was likely due to the outsized gains reported in the previous months. One of the explanations for the difference between the manufacturing surveys data and the “hard” data is that the former are usually influenced by the economic conditions and the firm’s expectations of the future. We think that manufacturing activity will remain strong, but could show some modest cooling down in the coming months as a result of payback for the significant gains. Overall, above-trend rates of expansion for the economy as a whole should continue, while labour market slack should continue to fade.