Global Daily – Eurozone growth likely only a little above trend

by: Aline Schuiling , Bill Diviney

Euro Macro: PMI stabilises at level consistent with growth only a little above the trend – The preliminary eurozone PMI data were released today. The eurozone continues to see a diverging story of fundamental drivers. On the downside, industry continues to be weak, and the manufacturing PMI has been declining since the start of the year. In August it fell to 54.6, down from 55.1 in July. Meanwhile, the more forward looking parts of the manufacturing PMI painted a mixed picture. Although the new orders component increased a bit (to 53.3 from 52.2), the stock of finished goods rose as well, implying that the ratio between new orders and existing stocks fell. Changes in this ratio of orders to stocks tend to move roughly in sync with changes in industrial production, implying that the weakness in the eurozone’s industrial sector has continued in August.

However, on the positive side, services (which make up almost 75% of eurozone GDP) continue to grow robustly. The services PMI increased to 54.4 in August, up from 54.2 in July. The forward looking new business component also rose (to 54.4 from 54.1), as well as the employment component. Thanks the rise in the services PMI the composite PMI for the economy as a whole increased slightly in August, to 54.4, up from 54.3. The composite PMI has been hovering around its current level in the past few months after it dropped sharply during the first five months of this year. At its current level it is consistent with GDP growth of around 0.5% qoq, which is only a little above the trend growth rate of around 0.3-0.4%. Indeed, our base scenario for the eurozone economy is for GDP growth of around 0.5% qoq in the second half of the year, although the risks to this scenario are tilted to the downside due to a possible escalation of the global trade conflict. In any case, with growth around trend and with risks to the downside, underlying inflationary pressures in the eurozone are expected to remain subdued for a considerable time. (Aline Schuiling)

​US Politics: Impeachment is not removal – Following the conviction of President Trump’s former campaign manager Paul Manafort, and the guilty plea of his former lawyer Michael Cohen, speculation has increased that the President may face impeachment proceedings should the Democrats win a majority in the House at the 6 November midterm elections. Based on the latest opinion polling, the Democrats do indeed have a reasonable chance of winning the House, and the implication of Trump by his former lawyer in the breaking of campaign financing rules would likely be sufficient grounds for impeachment. However, as with President Clinton’s impeachment 1998, this does not mean the President will be removed. For that, a 2/3 majority in the Senate is required. While Democrats could take some Senate seats, and perhaps gain a slim majority, it is arithmetically impossible for the party to achieve a 2/3 majority – not all seats are up for election, and of those that are, most are already held by Democrats. For President Trump, the charges against him have to be so grave that senators in his own party join Democrats to vote to remove him. A significant decline in the President’s approval ratings would likely also be necessary (as things stand, his approval ratings have increased through most of 2018). With the Mueller investigation still ongoing, such a scenario could yet materialise. But the events of recent days are unlikely on their own to lead to the President’s removal. (Bill Diviney)