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EMU CommentManufacturing sentiment continues to retreat

  1. Manufacturing PMI at a 21-month low…
  2. …probably still burdened by trade concerns
  3. But inflation picture still firming
Manufacturing PMI at a 21-month low…
As expected, Composite PMI in the eurozone continued on a more stable path on the back of the decline through H1 2019. The PMI index increased slightly to 54.4 from previously 54.3, almost in line with expectations. Hence, the PMI still trends fairly flattish but the Manufacturing PMI decreased to the lowest level since 2016 (at 54.6), probably still burdened by protectionist worries. Meanwhile, there was little comfort from the Service PMI which only increased slightly to 54.4. We would like to see the service sector gaining further optimism to support our view that domestic demand will be the prime driver behind our expectation of slightly higher GDP growth in H2 this year.
…probably still burdened by trade fears
Trade fears only seemed to be dimmed somewhat in August on the back of the more reconciliatory mood which emerged between Europe and the US. Manufacturing PMIs pretty much went sideways and French manufacturing export orders rose again in August after the first decline in two years in July. On the other hand however, in Germany, increases in new export orders and backlog of work both slowed another month. Both German and French Composite PMIs rose nicely by 0.7 points in August due to advances in service sector optimism, and Germany was particularly encouraging as the service sector activity rose by the most in six months.
But inflation picture still firming
Furthermore, employment in August increased by the most in six months, thus increasing the constraints on the labour market. However, output price growth slowed slightly in August. Although the latter is still compatible with gradually rising (core) inflation going forward. This was emphasised yesterday when negotiated wages increased by the most since 2012 (see graph). Hence, we finally sees signs of higher output prices feeding through to wages. The PMI data probably does little to change the ECB’s normalisation plans. The economy is stable, but not really picking up the pace, while the inflation picture still firms.

Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist


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