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EMU CommentTrade fears beginning to weigh?

  1. Flash PMI surprises on the upside
  2. Underlying signs of mounting trade war fears
  3. Lower but stable GDP growth for now
Composite PMI surprised on the downside
Following the surprise increase in June, the composite PMI fell back again in July. Thus, it still appears that the recovery has passed its peak and, despite some reassuring signals from the German manufacturing sector, there is also some evidence that the escalating global trade spat is beginning to leave its mark on the economy.
Trade war fears are evident in the details
Today’s flash estimate of Markit’s composite PMI for the eurozone decreased from 54.9 to 54.3 in July, which was below both market expectations (54.8) and our slightly more pessimistic estimate (54.7). The drop was driven by a fall in the service PMI from 55.2 to 54.4, whereas the manufacturing PMI somewhat surprisingly rose from 54.9 to 55.1. On the surface, the latter could suggest that the economy is defying trade war fears with especially the German manufacturing sector showing resilience. However, new orders in Germany showed a weaker inflow, backlogs showed the slowest increase in two years and the gauge for future output slipped to its second lowest level in 20 months. In France, exports of manufacturing goods dropped for the first time in almost two years in July and Markit highlights that the surveys saw worries about trade wars intensify markedly. Also worryingly, the survey reported increasing prices on raw materials as well as shortages and delays in deliveries, which suggests that (the threat of) higher tariffs might already be beginning to disrupt global supply chains.
Slower growth
The upshot is that there are still no signs of a collapse in growth, but the composite PMI is now consistent with quarterly GDP growth of about 0.4% (see figure) highlighting the slowdown in the economy from last year’s stellar performance, with increasing downside risks stemming from the current ongoing trade war. For now the domestic economy appears robust, but we will be looking for signs of any feed-through of trade worries to other sectors, with the decline in the new orders index in the composite PMI not boding too well. We do not believe that today’s figures will have any significant impact on the ECB's current policy, but we will be scrutinising the message from ECB chief Draghi on Thursday for clues as to whether the increasing risks could lead it to deter from its current plans of normalising monetary policy. Our current assumption is that we would have to see a much stronger deterioration in the economy to alter the ECB’s plans, as inflationary pressures currently continue to build despite the slowdown in growth, with some countries reporting labour shortages and rising wages and with increases in both the composite input and output Price indices.


Jes Asmussen

Chief Economist Denmark


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