Euro Macro: More weakness moving into Q3 – The eurozone PMIs for July were published today. The modest gains in the composite PMI that were registered in May and June were completely erased, with the index declining from 52.2 in June to 51.5 in July. This decline was the combined result of a drop in the manufacturing activity PMI (from 48.5 to 47.0 – the lowest level since April 2013) and a more moderate decline in the services sector activity index (from 53.6 to 53.3). At its current level, the PMI is consistent with eurozone GDP growing by just 0.0-0.1% qoq, which would be in line with our base scenario for the eurozone. Indeed, the forward looking parts of the PMI report also suggest that the economy will be close to stagnation, with the new exports orders component of the manufacturing PMI falling by almost three points in July to its lowest level since June 2012. On top of that the new business component of the services PMI declined by a full point, suggesting that activity in the services sector is being affected by the ongoing malaise in industry. The fact that the services sector is not immune to the weakness in industry was also illustrated before by a drop in Germany’s Ifo business climate in services and the ECB’s Bank Lending Survey that was published yesterday.
Other details of the PMI report suggest that the weakness in the eurozone economy, which began in exports and the manufacturing sector around the start of 2018 has spread to the labour market. Indeed, the employment component of the composite PMI lost a full point in July to a level consistent with only moderate employment growth. We think the deterioration in labour market conditions has further to go as the eurozone labour market reacts to changes in economic growth with a relatively long delay. This should result in the unemployment rate starting to move slowly higher at around the end of this year. Overall, the PMI reports support the case for an ECB stimulus package. We previewed tomorrow’s Governing Council meeting and set out our base case for the ECB in Monday’s Global Daily Insight. (Aline Schuiling)