Eurozone: some positive signals from PMI’s -  Danske

According to analysts from Danske Bank, today’s flash PMI reading for the Eurozone, signaled that manufacturing activity could strengthen further in the fourth quarter. They still see downside risks to 2017 GDP projections.

Key Quotes:

“The euro area manufacturing PMI figure for September rebounded towards the pre-Brexit vote level and there are signs that it will strengthen even further in the coming months. The order-inventory balance, which is usually a good leading indicator for manufacturing PMI, increased to the highest level since 2010 and indicates that the manufacturing PMI will increase considerably looking ahead.”

“The service PMI on the other hand, continued the downward trend it has been on since end- 2015, but it remains above 50 and still signals GDP growth around 0.3% q/q. The composite PMI new orders index was slightly higher in September but has been very stable over the past six months despite the UK’s decision to leave the EU. It currently points to GDP growth around 0.4% q/q in Q3, which is above our expectation for economic activity. Additionally, the signal of even higher manufacturing PMI from the order-inventory balance suggests growth could strengthen even further in Q4.”

“Our forecast for GDP growth is 1.5% in 2016 and 1.1% in 2017 with the latter mainly reflecting an expected weak start to the year. We see some downside risk to our 2017 forecast as the political events including the Italian constitutional referendum later this year, and the parliamentary and presidential elections in Germany, France and the Netherlands in 2017 could have a negative impact on the euro area economy.”

“We still expect the ECB to announce an extension of the QE purchases beyond March 2017 later this year and most likely in December. The main argument should be that the underlying price pressure remains too low with core inflation undershooting the ECB’s projection. Hence, we do not believe the ECB will conclude inflation is on a sustainable path towards its 2.0% target although we look for inflation to rise sharply in coming months.”