First data for the third quarter of the year were on the positive side. After declining in the previous two months, the closely watched Composite PMI for activity came in better-than-expected, rising by more than one point in July. At 54, it is consistent with a GDP growth rate in the range of 0.3%-0.4% q/q. The survey confirms that Germany is ahead than its eurozone peers in the economic cycle, with the composite index close to 56, and consistent with GDP growth above 0.5% q/q. By contrast, activity in France might at best remain stable (the French Composite PMI was close but below 50).
Survey details show that activity accelerated in both manufacturing and services sectors, with the latter recording a faster output growth. According to Markit, the compiler of the survey, activity reaccelerated after that an unusually high number of holidays had affected the effective working days over previous months. This factor largely contributed to the fall of industrial output in May (down by more than 1% m/m). It is worth stressing, however, that other elements such as the past appreciation of the currency (which affects activity with a lag) and geopolitical tensions have clearly affected the export-sensitive manufacturing sector. At least, the negative effects of one element should start to fade going forwards. The recovery in the US and in the UK is more advanced than in the eurozone. This should support the US dollar and the UK sterling against the euro. In addition the different path of monetary policy followed by the Fed and the BoE from one side and the ECB from the other, should weaken the euro as well. Last but not least, the ECB’s June package should moderate interest rates and boost credit, favouring the rebound of demand.
Despite the positive July figures, the recovery remains, however, weak. Orders are increasing but not at a sufficient pace to induce firms to hire more staff. The employment index was still just above the 50-mark, signalling that employment has just stabilized but it is not growing. In addition firms are still cutting output prices, preferring reducing margins rather than facing an even lower level of demand should output prices be higher. The incentive to invest in this environment is, therefore, quite low.
BY Clemente DE LUCIA
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