- Today's flash PMIs signal that the euro area remains in recession. The setback in PMIs fits well with the temporary weakness in Chinese data and might be due partly to the Chinese New Year. We believe data will show improvement in coming months but the euro area recovery is likely to be uneven and slow.
- The likelihood of an ECB rate cut has increased but the ECB should be aware that the weak March data may partly reflect the Chinese New Year and thus remain in 'wait and see' mode. We expect the ECB to be on hold until 13:45 CET on 7 May 2015.
- French PMIs point to a deep recession that is intensifying despite the global recovery. The country is very much in need of structural reform but the domestic pressure for more stimulus rather than reforms is likely to become substantial.
French PMIs
remain alarmingly weak. French service PMI fell from 43.7 to 41.9. Service sector business expectations fell from 50.4 to 47.5. All Service PMI sub-indices but employment declined. Outstanding business, business activity and new business indices are all below 43. French PMI manufacturing was unchanged at 43.9 but French manufacturing PMI new orders fell from 41.6 to 40.4. New export orders fell from 47.8 to 43.4. The downward trend in French orders started in early 2011. This points to a deep recession that is intensifying despite the global recovery. French PMIs are looking worse than those of Spain and Italy. This puts pressure on the government deficit and puts President François Hollande in a very delicate situation. France is very much in need of structural reform but the domestic pressure for more stimulus is likely to become substantial. In our view, the French fiscal deficit will be more than 3.7% of GDP (European Commission forecast). Until recently, the official government target was 3.0% of GDP.
German manufacturing PMI fell from 50.3 to 48.9, while service PMI fell from 54.7 to 51.6. Manufacturing new orders and new export orders fell below 50. German service new orders also fell below 50.
The likelihood of an ECB rate cut has risen but before pricing in an ECB rate cut note that the German PMI weakness fits well with the temporary weakness in Chinese data, so it could largely be due to Chinese New Year and we expect a rebound next month. The ECB should be aware of this and remain in wait-and-see mode. If the three- to six-month outlook remains fairly acceptable, the ECB is unlikely to deliver a rate cut. Our speed limit approach signals a 0.5% rate cut but this approach does not work well with rates already at a record low.
Euro area composite PMI fell from 47.9 to 46.5, signalling GDP growth slightly below 0.0%. PMI new export orders signals that exports should contract about 2% q/q. In 2011-12, exports generally performed better than PMIs indicate. The order-inventory balance signals further weakening, while our six-month model signals that manufacturing PMI should improve to around 50. We believe that data will show improvement in coming months but the recovery is likely to be uneven and slow. See Research: Euro area – from recession to slow growth published earlier today.
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