Eurozone recovery is on track, according to the flash PMI data released this morning. The Composite PMI for activity, highly related with GDP growth, came in at 53.9 in May, almost stable with respect to April. The most forward-looking indices of the surveys (new orders in the manufacturing, and business expectations in the services) remained well oriented, suggesting that confidence might kept improving going forwards. Assuming a June’s Composite PMI of around the same magnitude of the previous two months, the quarterly average would be around 54, that is almost a full point above the Q1 average. This would confirm that the lower-than-expected Q1 GDP growth was probably more an accident, due to weather distortions, than a halt in the recovery process, which remains on track.
While Germany continues to enjoy robust growth, driven mainly by an acceleration of activity in the services sector, activity in France was rather disappointing. In the rest of the zone, however, the recovery is gathering pace.
By sector, activity growth accelerated in the services, while it slowed down in the manufacturing. This probably confirms that the recovery is entering in a more self-sustaining phase, where the most domestically oriented sectors (services) drive the recovery. Another sign confirming that domestic demand might strengthen going forwards, came from the employment indices which suggest that job growth was increasing in both sectors, although at very modest pace.
Yet, cases of concern persist, mainly regarding prices. Firms’ pricing power seems extremely low. Despite input prices accelerated in May, firms selling prices kept on falling. This suggests that firms still have to deal with a level of domestic demand, that although recovering, remains weak. The survey, therefore, suggests that inflation might remain extremely weak and it might even ease further going forwards, something that probably will not pass unobserved in Frankfurt. The ECB is widely expected to take further measures to boost demand in June, lifting inflation and inflation expectations.
BY Clemente DE LUCIA
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