EMU CommentPMI surprises on the downside again

In March, the Markit Composite index in the eurozone decreased more than expected to 55.3 from previously 57.1. The surprising decline was more pronounced than in February, and it brought the activity barometer down to the lowest level in 14 months. This suggests that the slowdown is more of a fundamental nature and not just a reaction to the financial market jitters earlier in the year. The moderation might very well be influenced by increasing worries about protectionist trade tendencies as well as an effect of the stubbornly strong EUR. This compares well with weakness being greatest within the manufacturing PMI and, in particular, the new orders index took a hit for the third month in a row. National level PMI showed an even more marked decrease in Germany. Even though the Composite PMI index has fallen for two straight months, the high starting point in January implies that the average for the first quarter is almost in line with the healthy reading from fourth quarter 2017, indicating unchanged robust GDP growth. However, the weaker momentum suggests that second quarter growth might very well prove weaker (see first graph).

Today’s PMI’s strengthened the signs that eurozone growth peaked over the turn of the year and we should expect growth to moderate somewhat this year. While domestic demand might hold up well this year due to improvement in the labour market, the risk is especially that the solid contribution from net trade last year will prove hard to sustain. After a period of continuously improving outlook for the eurozone economy, it seems that we have entered a more “soft” phase. The ECB probably will also recognise this and further “exit” signalling will likely be limited in the near term. Add to this that both the Composite PMI price index and employment index also weakened another month, but that still compares with inflation rising gradually in the coming months (see second graph).