Eurozone: PMIs Offer Positive Gimmers - Too Good to be True?
The latest PMI data suggest that the economic contraction it has previously pointed to and which has been largely validated by official data eased somewhat further into 2024. Indeed, EZ real activity fell at the slowest rate for eight months in February, according to provisional PMI survey data, with the composite Index rising from 47.9 in January to 48.9 in February, the latter being the smallest implied decline since last June. The data are highly regarded by the ECB at least in terms of activity and thus will be positively received by the hawks, not least given the survey’s suggestion that wage and price pressures are on the rise again, albeit only in the services sector. We are more sceptical about the data, noting the poor correlation between the PMI and EZ GDP growth of late (Figure 1) and the survey’s lack of focus on retailing, construction and the impact of additional fiscal consolidation. Even so, the survey data may be used as a rationale for the ECB not to pare back its GDP forecasts too much at the looming Mar 7 Council meeting, even though clear downgrades are the order of the data of late in France and Germany.
Figure 1: Survey Data Contrasts with EZ GDP Weakness
Source: Datastream
Sectors and Economies Diverging Again
While both the manufacturing and service sectors saw business activity remain weak and fragile, the rate of contraction became even more pronounced in the former. Indeed, the survey very much highlights the increasing divergence evident within the EZ economy, not only between the two main sectors but also nationally. German economic weakness is seemingly intensifying, partly due to the economy’s manufacturing base (and fiscal worries (see below), while activity elsewhere is seemingly recovering. What is fueling the recovery is unclear. Lower price and wage pressures may help in this regard, but the survey suggests the very opposite, at least in services. It is also the case that the survey which 3-4 months ago was very much stressing the impact of ECB rate hikes in explaining waning activity, no longer even mentions policy – does this mean that the respondents are anticipating lower interest rates? If so, then the ECB is getting a confused message as the improved tone in the survey would be dependent upon the central bank actually reducing rates in the not too distant future.
Fiscal Consolidation Intensifying?
We are also skeptical about the survey due to its relatively limited coverage, not including the three sectors possibly most fragile at the moment, namely construction (its PMI is very negative), retailing and government. As for the latter, it is noteworthy that fiscal policy is already tightening across the EZ as governments unwind energy support policies, but this has taken a new twist of late. Indeed, in France this week, revised government forecasts pared expected GDP growth this year down to 1% from the 1.4% projection that had been the basis for the 2024 budget, partly due to further cuts in government spending – NB; the 2024 budget already included roughly €16bn in cuts, mostly from phasing out energy subsidies, but it seems that additional cuts are needed to meet a commitment to reduce the budget deficit to 4.4% of GDP this year.
Meanwhile, in Germany, the Bundesbank struck a very negative tone earlier this week, suggesting the economy is set to continue shrinking in the first three months of this year, partly a result over uncertainty over government policy as well as transport strikes and weak consumer and industrial demand. Thus has forced the government to revise down its GDP growth forecast for this year from 1.3% to 0.2% and for next year from 1.5% to 1%, partly a result of the effective fiscal €60bn black hole in its spending plans after the constitutional court last November banned the use of off-budget financing vehicles to by-pass the country’s debt brake..