• The eurozone composite PMI fell further in February …
• … signalling weaker economic activity and lower inflation
• Softer data could help sway moderates at ECB to back aggressive easing
• US manufacturing PMI also fell adding to weak global picture
Global-Daily-Insight-23-February.pdf (61 KB)
Composite PMI lower again
The eurozone’s composite PMI staged its second monthly decline in a row. It fell to 52.7 in February, down from 53.6 in January. This decline has closed the gap between the composite PMI and GDP growth that had built up during the second half of last year. In fact, the PMI is now at a level that is consistent with GDP growth weakening somewhat from the 0.3% qoq that was recorded in 2015 Q4. Such a slowdown in GDP growth is in line with our below-consensus scenario for the eurozone economy. Indeed, we forecast the eurozone economy to expand by 1.2% this year, down from 1.5% in 2015.
Slowdown driven by exports and industrial output
The details of the PMI report show that the weakness in the first two months of this year was concentrated in the industrial sector, with the manufacturing output index dropping by more than twice as much as the services sector activity index. This reflects the weakening of the global economy on the back of the ongoing tightening of financial conditions and heightened uncertainty caused by the market turbulence since the start of the year, as well as the appreciation of the trade-weighted euro since early December 2015.
PMI report also points to lower inflation
The price components of the Eurozone PMI report show that disinflationary pressures intensified further in February. Both the input and the output price index of the composite PMI declined that month and both indexes are now below their long-term average value. As in the case of the activity indexes, the weakness in prices was also concentrated in manufacturing. Indeed, the input prices index of the manufacturing PMI dropped to 40.4 in February, down from 41.1 in January. It now is at its lowest level since July 2009, when the global economy was contracting on the back of the financial crisis.
Eurozone PMI survey could sway moderates on ECB Governing Council
The weak activity and price readings from the PMI could help to sway some of the more moderate members on the Governing Council to back the doves to push through more aggressive monetary easing. In December, when the ECB disappointed with a more measured easing package, survey indicators painted a stronger picture of the economy. Our base case is that the ECB will surprise markets to the upside in the coming months delivering 40bp of deposit rate cuts (spread over March and June) as well as an increase in QE (facilitated by a dropping of the deposit rate floor for purchases).
US manufacturing PMI adds to soft global picture
Markit’s US manufacturing PMI fell to 51 in February from 52.4 in January, leaving it at its lowest level since October 2012. The details of the report were generally weak, with the new orders index falling more than the headline. This survey follows on the heels of declines in other nationwide surveys in the US, such homebuilder confidence and consumer sentiment (though those are coming down from higher levels). Overall, February’s PMI surveys add to the soft global picture and suggest the global economy remains stuck in a soft patch. We think lackluster growth will persist for a while followed by a moderate improvement later in the year.