- Eurozone composite PMI rises to highest level in four-and-a-half years…
- … signalling stronger economic growth in Q4 …
- … although the link between the survey and GDP growth has loosened in recent months
Eurozone composite PMI unexpectedly rose in November
The eurozone composite PMI rose from 53.9 in October to 54.4 in November, staging its second consecutive monthly increase and reaching its highest level in four-and-a-half years. The consensus forecast was for stabilisation. The rise in November was a combined result of an increase in the manufacturing output index from 53.6 to 53.9 and a rise in the services activity index from 54.1 to 54.6. Some of the more forward looking components of the indices improved markedly as well. For instance, new orders in manufacturing and services both rose in November, while the ratio between orders and stocks in manufacturing improved.
Moreover, the details of the report indicate that the gradual recovery of the labour market is continuing, with the employment component of the composite PMI moving further into the territory that is consistent with growing employment (up to 52.6 from 52.0). Finally, the report suggests that price pressures is still subdued. Although both the input and output price components of the manufacturing PMI rose in November, they remained well below the 50 level, that separates rising prices from falling prices. Meanwhile, in the services sector, the input price component as well as the output prices component declined in November.
Link with GDP growth has loosened
At its current level, the composite PMI is signalling a sharp pick-up in economic growth in the final months of this year, following the slowdown in GDP growth in Q3 (to 0.3% qoq, down from 0.4% in Q2). Still, the link between the composite PMI and economic growth has loosened since the start of this year and it seems that the PMI is even following GDP growth with a lag of one or two quarters. Therefore, we think that November’s rise in the PMI may be over-estimating the level of economic growth. Although we expect a pick-up in economic growth in Q4 we think that it will be more modest than the composite PMI suggests. Indeed, we have pencilled in 0.4-0.5% qoq. Overall we still expect the ECB to further ease its monetary policy on 3 December, despite this better-than-expected PMI report.