Flash Comment: PMI Signals Slow Recovery‏

The eurozone manufacturing PMI declined slightly from 51.4 to 51.1, while the service sector PMI increased from 50.7 to 52.1. The same pattern was seen for both Germany and France. It might indicate a shift towards a more domestic demand driven recovery, though it seems a bit too early for that.

While soft data have continued to improve, hard data have indicated a setback (industrial production and industrial orders declined unexpectedly in July). Today's data suggests that the weakening in hard data was temporary, and that a slow European recovery is still in place.

Manufacturing PMI now points to growth just above 1.5% y/y and composite PMI sends pretty much the same signal. The order-inventory balance points to further increases in manufacturing PMI in the coming months while our six-month model for manufacturing PMI is more downbeat. Recently the order-inventory balance has been the most trustworthy signal. The French order-inventory balance improved sharply (driven by a sharp decline in stocks), while there was a small decline in the order-inventory balance for Germany.

PMI new export orders declined slightly, but still point to a temporary strengthening of eurozone export growth to around 4% q/q. The positive outlook is underpinned by Chinese new orders, which has increased sharply in the past two months.

The employment indicator has improved to the highest level in two years for both industry and the service sector, but while it indicates stable employment in the service sector it still points to further decline in employment in the industrial sector.

The continued improvement in European soft data has reduced the likelihood that the ECB will cut further, and composite PMI new orders now signal that it should not. We expect the ECB to undertake further easing in the form of a 3Y LTRO. This will be triggered by declining excess liquidity pushing the short market rates further up towards the refi rate.

We expect the fragile recovery to slowly become more robust and gain further in strength next year. We now expect growth to be around 0.25% this year (consensus is -0.4%) and 1.3% next year (consensus 1.0%).

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