Euroland: Surveys Smell of Recession

Daily Forex Fundamentals | Written by Danske Bank | Jul 24 08 10:34 GMT |

Overview: July business surveys out of Euroland this morning surprised significantly on the downside: Euro-land Service PMI declined from 50.1 in June to 47.0 (DB: 48.1, Cons: 49.0); Manufacturing PMI declined from 49.2 to 49.0 (DB 48.1, Cons: 49.7); and the German ifo business climate survey dropped from a revised 101.2 in June to 97.5 in July (DB: 99.2, Cons: 100.1). The data significantly added to the impression that economic growth - in Germany too - is slowing at a fast clip. Not only did the new data indicate that Euroland economic activity is now stagnating, they also suggest that the European economy could be about to slide into a recession, should the business surveys deterio-rate further in the coming months. Details: The Flash PMI estimates included country details on Germany and France. The German data was the least negative - at least on the surface. German Service PMI picked up to 53.3 in July from 52.1 in June, indicating that the German service sector continues to expand, albeit at a moderate pace. This positive sur-prise was, however, overshadowed by a decline in the German Manufacturing PMI from 52.9 to 50.9 and the even steeper decline in the German ifo index. The details of the German Manufacturing PMI reveal an even weaker picture than portrayed by the headline, as the New Orders index saw an unusually deep plunge from 52.3 in June to 42.3 in July. With output still not contracting (50.6 reading in the Output index), the German manufacturing sector seems to have an ongoing inventory problem, suggesting that production cuts will be necessary to bring demand and supply into balance going forward. The French data were outright weak. The Manufacturing index declined from 49.2 in June to 47.3 in July, while the Service index declined from 50.1 in June to 47.0 in July. These data suggest that France may be very close to a recession. Assessment & Outlook: Overall, the PMI's suggest that semi-annual growth in Euroland is tracking close to zero. That said, we are likely to see negative growth rates as early as Q2. This will in part reflect genuine weakness, and in part be a payback for the strong Q1 growth, which was largely carried by technical factors such as heavy inventory-building in Germany, better-than-usual weather, etc. The interesting thing is that today's data lower the baseline for growth in Q3, and thereby increase the risk of a second quarter of con-traction in Euroland GDP growth (see for instance Research Germany: Recession looming, July 16). The recent weeks' retrenchment in the commodity market combined with today's weaker-than-expected survey data lowers the risk that the ECB will deliver more hikes this year. We continue to see the central bank on hold for a prolonged period. Danske Bank Disclaimer This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets' research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.