Global Daily – Euro economy shakes off Greece

by: Aline Schuiling , Maritza Cabezas

  • The eurozone composite PMI rose to its highest level since May 2011 in June …
  • … suggesting that the eurozone economy has remained unaffected by the Greek crisis so far
  • US business investment picks up in May, showing better prospects for the US economy

Eurozone composite PMI higher than expected

The eurozone composite PMI increased to 54.1 in June, up from 53.6 in May. The outcome was better than the consensus forecast of a small decline and the rise lifted the composite index to its highest level since May 2011. It was the combined result of an increase in the services sector PMI (to 54.4 from 53.8) and in the manufacturing output index (to 53.5 from 53.3). At its current level the composite PMI is consistent with GDP growth strengthening somewhat at the end of Q2-start of Q3, which is in line with our scenario for the eurozone economy. Indeed, we expect GDP growth to rise to quarterly rates of around 0.6% in the second half of this year, up from the 0.4% qoq that was recorded in Q1.

Three tailwinds …

The eurozone economy currently is benefitting from three tailwinds: a weak euro, low oil prices and easy financial conditions. The ECB’s QE policy has not only pushed the euro lower, but has also resulted in a market decline in bank lending rates, particularly in the periphery. Combined with the fact that banks have eased lending conditions in the past few quarters, this has opened the bank credit channel. Meanwhile, the drop in oil prices since the middle of last year is still working its way through the economy, lifting consumers’ spending power and lowering the energy bill of companies. These factors seems to have a stronger bearing on the eurozone economy than the negative influence of the rising fears for a Grexit.

… stronger than the headwind of Greece

Rising fears for a Grexit have hurt risk appetite in financial markets in the past few weeks, weighing on equity markets and peripheral bond markets in particular. However, part of these losses have been gained back in the past couple of days, following the new proposals by the Greek government,  which have opened the way for a deal between Greece and its creditors. Indeed, all the parties involved seem committed to reaching a deal later this week, and we think that this is the most likely outcome of the current negotiations. Therefore, we think that the impact of the Greek crisis on the overall eurozone economy should remain limited.

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US business investment picks up in May

A key measure of business investment, core durable goods orders, excluding defense and aircraft, advanced 0.4% in May, after falling 0.3% the previous month. March’s business investment was, however, considerably strong, increasing 1.6%. Another component of the report, shipments of core capital goods, which are used by the BEA to estimate investment in durable equipment for GDP, increased 0.3% in May. Manufacturing, in general, has been affected by the strong dollar and lower oil prices, which has resulted in spending cuts in the energy sector. However, it looks to be shaking off these effects. Meanwhile the headline number of the report, durable goods orders fell -1.8% in May from -1.5% the previous month. The decline in the past two months of the headline number reflected a fall in aircraft orders, a volatile component in the report.

Better prospects for the US economy in the second quarter

This report suggests that there is some momentum in business investment. In this second quarter we expect to see the economy recovering from a temporary slowdown.  Other sectors in the economy have already been showing signs of strength, including the housing sector and retail sales.