Manufacturing PMI declined to 53.0 from 54.0 (consensus: 54.0, DBM: 54.1), while service PMI showed a little increase to 51.7 from 51.6 (consensus and DBM: 51.9). PMIs indicate GDP growth around 0.3% q/q in Q1, which is in line with our expectations. Nevertheless, the sideways movement might be a bit of a concern for the ECB at a time when credit developments remain weak and the global growth picture is weaker. Hence it adds pressure on the ECB at a time when inflation is far below the 2% target.
The drop in PMI manufacturing is partly due to a decline in new export orders, but there was a larger drop in new orders, hence some of weakness is also due to weaker domestic demand. Looking ahead the order-inventory balance suggests that PMI manufacturing could move sideways.
German manufacturing PMI declined to 54.7 from 56.5 while service PMI increased to 55.4 from 53.1. Hence the gap between the figures has been closed and they now point to GDP growth around 1.0% q/q in Q1, which is a considerable improvement from growth at 0.4% q/q in Q4 2013. The decline in manufacturing PMI reflects a decline in new orders while stocks of finished goods increased a little. The order-inventory balance points to a downward correction in PMI manufacturing. New exports orders also declined, thus some of the weakness also reflects weaker global growth.
In France manufacturing PMI declined a bit to 48.5 from 49.3 and service PMI was down to 46.9 from 48.9. For manufacturing the details were weak as the new orders index declined and stocks of finished goods increased. The order-inventory balance suggests that manufacturing PMI will continue its sideways movement. Service PMI has trended downwards since fall last year and is now back at the level seen last summer, but on a positive note the business expectation component is at the highest level since March 2012. Currently, French PMIs signal growth around 0.1% q/q, which is below the growth rate of 0.3% q/q in Q4 2013.
ECB may to decide for further easing due to dissapoint PMIs
At the ECB meeting in February the message from Draghi was, that the ECB did not act due to the need for information and he said “the reason for today’s decision not to act is really to do with the complexity of the situation”. One of the things which were needed was information about economic activity. Euro GDP growth in Q4 was stronger than consensus expected (in line with our expectation), but the PMI figures released today suggest that growth will not accelerate much from here.· Hence the PMI figures might be a bit of a concern for the ECB and it could bring forward the decision of the ECB to ease further. The focus on lack of information and high uncertainty at the ECB meeting last month seemed to be a way for Draghi to buy some time before taking any decision and we still believe the ECB will ease again. If the ECB eases again, it will most likely be in March, when the ECB staff forecasts are published, or in April, when an expected 0.5% print in the March inflation has been released.
We have previously argued for a deposit cut, and even though it still seems to be part of the discussion, the latest communication from ECB members suggest that other options are also on the table. The Bundesbank has said it is open to adjust the SMP drain if necessary to further confirm the euro system’s accommodative monetary policy. Hence, this could be a compromise. In our view, the communication from ECB members suggest that the discussion is not about whether to ease again, but on which instrument to use.
To Read the Entire Report Please Click on the pdf File Below