In October, euro area PMIs stabilised around their previous levels, which raises the question: have we reached the trough, or does a further slowdown lie ahead? In support of the 'trough view', manufacturing PMI new orders and Ifo expectations both ticked up in October. Furthermore, a range of political tail risks has abated, as it now seems as though US-China trade tensions have peaked (see China Weekly Letter - US compromise raises chances of a real trade deal , 18 October) and the risk of a no-deal Brexit has declined substantially (see Brexit Monitor - Election is an EU referendum in disguise - difficult to predict the outcome from polls , 30 October). However, political uncertainty still slumbers in the background and Chinese PMIs were mixed but details indicate reasons to be optimistic. Hence a turnaround in euro area exports and the manufacturing sector still seems difficult to imagine for Q4 and we expect a trough to be reached only in early 2020 (see Euro Area Research - Manufacturing cycle: recession or recovery? , 10 October.
If it is too early to call for a trough, are we then heading for a continued slowdown? Judging from the ongoing deteriorating in employment expectations in both the service and manufacturing sector, the risk of further slowdown remains tangible, as falling employment will leave its mark on the so-far strong domestic side of the economy, raising the risk of a more protracted downturn. In summary, the stabilisation in PMIs and the euro area Q3 GDP advance growth estimate at 0.2% q/q are encouraging but we still see downside risks, especially if the fall in the employment indicators continues.
At least it seems that new ECB president Christine Lagarde can start her term with less headwind from the economic side. This is because not only did the economy defy the markets' recession fears in Q3 but core inflation also edged up for a second consecutive month, to 1.1% in October. Does this mean core inflation is past the trough? The ECB certainly hopes so, as any appetite among Governing Council members for further rate cuts remains very muted and markets' have scaled back their expectations of further cuts to come. The latter was partly due also to Mario Draghi's last ECB meeting bringing little in terms of new policy signals, apart from a hint that ISIN limits could be changed down the road (see Flash ECB Research - Thank you, Draghi , 24 October).
German politics has come back into the spotlight. In the first round of the SPD leadership vote, no candidate secured an absolute majority, meaning there will be a run-off between the two best performers, with the results announced on 29 November. While current finance minister Olaf Scholz's 'continuity' team came in first, his lead was smaller than expected. Moreover, a dire election defeat in the state election in Thuringia for both the SPD and CDU/CSU will probably expose further cracks in the governing coalition, with a decision on its future expected towards year-end. Hence, investors should keep the possibility of a new government/election in Germany on the cards for 2020.
Danske euro area growth tracker
Our Danske growth tracker declined marginally to stand at -0.3 in October. Financial variables ticked up a bit to -0.9, while economic variables fell into negative territory. Although economic variables stand at -0.1, the overall risk of a recession remains low at the current stage, as indicated by our growth tracker traffic light.
Euro area
Germany
France
Italy
Spain
