Eurozone: PMIs point to an acceleration of the Franco-German growth engine – Deutsche Bank

Peter Sidorov, Economist at Deutsche Bank, explains that Euro composite PMI reaches new cyclical highs for the second month in a row as the composite PMI again surprised to the upside in the March flash reading, rising by 0.7 points to 56.7 (exp 55.8), a second consecutive cyclical high.

Key Quotes

“As in February, the rise was driven by the services index (up 1.0pts to 56.5). The manufacturing PMI also improved in the headline (up 0.8pts to 56.2) but it was flat in output subindex.”

“France and Germany accelerate; ‘non-core’ marginally down

Both France (+1.7pts to 57.6) and Germany (+0.9pts to 57.0) led the way for the acceleration of the euro area composite PMI. With France and Germany printing stronger rises than the EMU aggregate, the data suggest a marginal decline (-0.2pts) on average in the composite PMI in Italy, Spain and Ireland. The PMIs in the ‘core’ and ‘noncore’ countries had moved largely in line since the middle of last year but today’s flash figures appear to suggest that the improvement in the latter may have now reached its peak while the Franco-German engine continues to gather steam. Of course, the usual caution against reading too much into one month’s data applies.”

“New cyclical highs across the board for the euro composite PMI subindices

The positive message of the euro area PMI headline was shared in the details. The euro area composite PMI subindices – new orders, employment, input and output prices and backlogs of work – all reached new cyclical highs in today’s reading. Of these we would in particular highlight the 1 point rises in employment (54.9) and output prices (53.2). The latter is among the signals of increasing pipeline inflation pressures, while the former stands at odds against expectations for euro area employment growth to slow down slightly in 2017 from the impressive 1.3% yoy seen in 2016.”

“Surveys signal upside risk to our Q1 growth view but hard data are more mixed

At the average Q1 level of 55.7, the euro area composite PMI is consistent with GDP growth of between 0.6% and 0.7% qoq, well to the upside of our projection of between 0.3% and 0.4%. This upside is most visible in Germany. We have highlighted the upside from surveys to our growth view since the start of the year, but the hard data flow has been more mixed suggesting a more limited upside than the surveys. This may in part reflect seasonal volatility, although in Germany the survey versus hard data dichotomy has been present since Q3 2016. We remain watchful of the hard data flow. The February data start with retail sales figures at the end of next week.” 

“We see a clearer upside risk to our view for Q2 than for Q1

We see a more significant risk form the positive PMIs relative to our view as being for Q2. At its latest level, the euro area composite PMI is in line with the economy growing at between 0.7% and 0.8% qoq. Our moderate Q2 growth view (0.3%) is predicated on some slowdown in activity due to the political calendar. However, surveys have shown no sign of this having an effect thus far. With less reason to expect temporary effects to weigh on activity as in Q1 (e.g. the very cold January), we see latest PMIs as presenting a clearer upside risk to our Q2 view than for Q1.”