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EMU CommentLargest decline in PMI in five years

  1. Elevated levels from previous months hard to sustain
  2. Weakness was broad based
  3. Only market jitters? ...ECB probably not overly concerned
Elevated levels from previous months hard to sustain
The preliminary February Composite PMI decreased more than expected to 57.5, from the almost 12-year high of 58.8 in January. The decrease was almost in line with our expectation and thus the biggest in five years. While this curbs the healthy economic sentiment from the previous months, it was unlikely that the unexpectedly high confidence reading from the previous months could be sustained. The recent jitters in financial markets probably partly explain the sharp decline, and it will be interesting to see if sentiment recoups some of the loss in next month’s readings, as the market volatility seems to have abated for now. Even though PMI decreased more than expected, it suggests that GDP growth could pick-up in the first quarter (see graph).
Weakness was broad based
Weakness was evenly distributed between Services and manufacturing. The latter saw PMI falling for a second month to 58.5 from previously 59.6. Besides the recent correction in stock markets, manufacturing confidence was probably hurt by the stronger EUR, combined with weaker PMI readings abroad in recent months, and recall that eurozone manufacturing PMI reached a record high in December. Service PMI also took a hit (fell to 56.7 from previously 58.0), probably influenced by the stock market jitters combined with higher interest rates and a more stable improvement in labour markets. This was in line with the decrease we saw in February consumer confidence yesterday. Additionally, preliminary French and German Composite PMI fell almost alike, to 57.8 and 57.4 respectively.
Only market jitters? ...ECB probably not overly concerned
While today's PMIs were a disappointment, the level of the sentiment indicators is still robust and the level from the previous months is hard to sustain. Hence, we will have to wait and see whether this marks the beginning of a declining trend or if this was merely a transitory response to financial market jitters (see graph). We do not believe that the ECB is overly concerned about this one month sharp decline, and the price indices and employment also stayed elevated, despite small declines.

Source: Macrobond


Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist


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