Euro Macro: Composite PMI stabilises, despite some further weakness in industry – Following two consecutive months of sharp drops, the eurozone composite PMI stabilised at 55.2 in April. The composite PMI is a weighted average of the services sector activity index and the manufacturing output index. The stabilisation of the composite index was the combined result of a rise in the services activity index (from 54.9 in March to 55.0 in April) and a decline in the manufacturing output index (from 55.9 to 55.8). Although the manufacturing output index declined only modestly, the more forward looking parts of the manufacturing survey weakened more noticeably. For instance, the new industrial orders index dropped by 1.2 points to 54.3 in April, with the new export orders declining by 1 point to 53.7. The ratio of orders to stocks declined from 114.1 to 109.7. Nevertheless, at its current level the ratio of orders to stocks would be consistent with industrial production growing at an annual rate of around 2-3%, which is still above the long-term average expansion of around 1%.
Overall, we think that the PMI report is in line our base scenario for the eurozone economy of ongoing growth above the trend rate. Temporary factors (e.g. weather conditions and shifts in winter holidays) might have resulted in some temporary weakness in the first quarter of this year, but a rebound in Q2 seems likely. Importantly, the domestic fundamentals behind growth have remained strong and should support continued robust growth in private consumption and fixed investment. Moreover, as we describe below, we believe a damaging trade war between the US and China will be avoided, and so we remain comfortable with our forecast of above-trend growth in the eurozone. (Aline Schuiling)
Global Trade Watch: Markets more relaxed about trade, but risks linger – Risk assets have recovered and safe havens have weakened in recent weeks, likely a reflection of (among other things) the more conciliatory rhetoric from both the US and Chinese leadership on trade. While this toning down in rhetoric is consistent with our base case that a damaging trade war will be avoided, the risks have far from disappeared. In our Trade war scenarios report (see here), we present a framework for understanding the contagion channels of a trade war, and use this to analyse three different scenarios – our base case, a negative scenario, and a worst case scenario. In our base case scenario, we allow for a limited implementation of tariffs (covering up to USD70bn of US-China trade), with the macro implications essentially negligible. In a negative scenario, where threatened tariffs are fully implemented, the uncertainty and confidence hit from this will likely lead central banks to look through any inflation impact and remove monetary accommodation more slowly. In a full trade war scenario, global GDP growth could fall by 2-2.5pp, and this would elicit a more pronounced dovish response from central banks. (Bill Diviney)