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EMU CommentFurther weakness in PMI, but ECB not likely to react (yet)

  1. PMI decreased for another month…
  2. …despite that German service confidence rose
  3. The ECB not likely to respond yet
PMI decreased for another month…
The PMI disappointed for another month as the Composite PMI decreased to 50.7 from previously 51.1. This is the fifth consecutive decline, and the improved situation in stock markets (first graph), combined with diminished global trade worries and political uncertainty in the eurozone, failed to turn the PMI around. We do see potential for the PMI to adopt a more stable development in coming months, probably slowly lessening recent worries that the slowdown in eurozone economy is happening much earlier and faster than previously expected. That said, the weaker growth over the turn of the year probably implies that GDP estimates (including ours) for 2019 will be revised down.
…despite that German service confidence rose
The eurozone PMI was dragged down by decreases in service and, in particular, manufacturing sentiment. It is also worth noting a new big decline in the Composite PMI employment index, adding to signs that we could see a turnaround in the labour market this year (second graph). German Composite PMI increased, while the French declined almost by the same amount, so the further eurozone weakness is probably found outside these core countries. German service PMI improved nicely to 53.1 from previously 51.8, and generally we see support from recent improvements in consumer confidence and retail trade (third graph). The French service PMI declined for another month, probably weighed down by the public protests. On the other hand, the manufacturing weaknesses prevailed, with German manufacturing PMI dipping below 50 (contraction/expansion-threshold) for the first time in more than four years. So a stabilisation here is yet to be seen, but we still tend to believe that decreasing bottlenecks in the auto sector and the currency effect from the EUR will support the manufacturing sentiment in coming months.
The ECB not likely to respond yet
The weaker PMI over the past months has probably also made the ECB more worried about the economic prospects for 2019. However, the members of the governing council have gone a long way to warn against overreacting to the weaker data, while acknowledging that the “temporary” period of weakness has shown to be more prolonged than earlier expected. So it is likely that we will see new downward revisions of the banks' GDP estimates when they are due at the March policy meeting. However at today’s meeting, the ECB will probably refrain from sending a new clear message, while seeing that confidence (in reaching policy target) is less pronounced and caution has increased.

Source: Macrobond


Source: Macrobond


Source: Macrobond



Rasmus Gudum-Sessingø

Senior Economist


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