- The eurozone manufacturing PMI rose above the ISM index in March
- We expect eurozone growth surprises, but ISM might be understating strength of US economy
- Greece’s new reform plan relies on optimistic assumptions about tax collection
Eurozone manufacturing PMI above US ISM index
Ask economists just a few months ago about the state of the two economic giants on either side of the Atlantic and the narrative would have been clear. On the one side, the fast-growing, shiny, dynamic US economy. On the other side, the stagnating moribund eurozone, at risk of falling into a deflationary spiral. Zoom forward to yesterday’s PMI indexes, and the story appears very different. The eurozone manufacturing PMI rose to 52.2 in March from 51.1 in February. Meanwhile, the US ISM manufacturing index declined to 51.5 from 52.9. Is an accelerating eurozone economy about to overtake that of the softening US?
Growth surprises on the cards in the eurozone
The answer to that question is possibly, but not for long. It is certainly true that the eurozone economy is gaining momentum. The fall in the euro, the decline in oil prices and easing bank lending and financial conditions more generally, should provide considerable support. Indeed, we think growth is likely to surpass consensus estimates by some margin.
Temporary slowdown in the US
So Q1economic growth in the eurozone looks likely to be above its Q4 level. At the same time, the US looks set for a rather soft start to the year, and it could even underperform the eurozone. However the US weakness looks to a large extent down to special factors, such as bad weather and port strikes. Economic growth should rebound from Q2 onwards and should then be back above that of the eurozone.
ISM manufacturing index may understate US growth
At the same time, the US ISM index may be understating the US growth picture, certainly in term of the coming quarters. A stronger dollar is making it tougher for manufacturers to export and lower oil prices are resulting in cutbacks in oil & gas capex. However, manufacturing is a small part of the economy and domestic conditions are improving. Indeed, consumers are benefiting from the strong labour market and lower oil prices. Furthermore, even in manufacturing, conditions may not be that bad. Markit’s alternative manufacturing PMI for the US rose to 55.7 in March from 55.1 the previous month.
A new Greek reform plan courtesy of the FT
Greece yesterday sent a new more detailed 26-page reform plan to its European partners. As has become normal, the full document was also made available to the FT newspaper, which published it on its website. The Wall Street Journal then subsequently reported that European officials did not think the document was detailed enough to be the basis of an agreement, implying that there was further work to be done. So it remains to be seen to what extent the plan marks a step forward.
The Greek plan sees a primary surplus of 3-4% GDP…
Under the base line scenario, which assumes no policy changes, the primary surplus is projected to be 1.2% GDP in 2015. However, that could rise to 3-4% GDP on the back of the reform efforts proposed by the Greek government. The plan estimates the measures will boost tax revenues by 2.6-3.4% GDP, while privatization will bring in just short of 1% GDP. This will offset an increase in expenditure of around 0.6% GDP.
…but relies on some heroic assumptions
However, all this is very optimistic. Most of the tax revenues rely on a very quick and sharp improvement in tax collection. In addition, economic growth of 1.4% is assumed, while the economy is currently stagnating.