The slump in eurozone new manufacturing and export orders is countered by service sector resilience and healthy domestic demand on the back of wage growth and fiscal stimulus.
- Hard manufacturing data less pessimistic than business surveys
- Rises in employment, higher pay and lower energy costs imply consumption support
- Impact of recent external shocks should fade
Macroeconomic development in the eurozone has remained disappointing, with slowing growth extending into 2019. Support for GDP growth from abroad remains a headwind: slowing global manufacturing activity in an environment of high and rising political and policy uncertainties bodes poorly for manufacturing in the eurozone.
Indeed, the March survey of purchasing managers pointed to more bad news in the manufacturing sector. The PMI index dipped from 50.5 in January to contractionary levels of 49.3 and 47.6 in February and March, respectively. Turning to the forward-looking aspect of the data, we find new orders unchanged on the month at the symbolic 50.0 “no change” point. But the sectoral split shows that sector weakness is evident – the indices for both new manufacturing and export orders slumped to below 45.
Hard data, although lagging, painted a less pessimistic picture. January’s industrial production grew by 1.4% month-on-month (MoM), which is 0.4% above the average for the previous quarter.
The indicator for new passenger car registrations posted its fourth consecutive increase in January, confirming expectations for a normalisation in car registrations after the disruption caused by the implementation of new car emission standards. Although there are undeniable signs of external risks to growth in the manufacturing sector, it remains to be seen whether the hard data will reflect the same scale of contraction in activity as implied by the PMI surveys.
Consumer confidence improves…
On a positive note, the eurozone’s services sector is showing signs of resilience. The services PMI bounced from a low of 51.2 in January to 52.8 and 52.7 in February and March, respectively. The new business balance for services improved to 52.1 in March – its highest since November 2018.
The latest economic indicators are pointing to steady growth in private consumption. Most eurozone countries saw broad-based increases in employment in Q4 2018. The cumulative growth in employment, coupled with rising wages and the recent drop in energy prices, implies steady growth in households’ real disposable income.This should continue to support consumer spending.
Indeed, consumer confidence rose for a second consecutive month in February, halting the decline in most of 2018. This is consistent with ongoing steady growth in private consumption.
…but improvements in external factors are also needed
While the resilience of domestic growth is comforting and will likely act as an economic shock-absorber in the near term, a deeper-than-expected slowdown could eventually cloud the outlook for the labour market and cause consumption to slow.
An improvement in external factors will thus be needed to turn the economic momentum from its current slowing trend. We see an increasing likelihood that the uncertainty shocks which have hit the global economy and markets in recent months should fade. First, stimulus efforts by the Chinese authorities should help Chinese growth to bottom out. Second, the trade truce and an emerging trade deal between the US and China should help to halt the slowdown and disruption in global trade, although the timing and magnitude of a deal remains uncertain.
Third, while the Brexit situation remains fluid, the removal of an immediate threat of a disorderly Brexit should help to reduce the level of economic uncertainty in the eurozone in the near term.
Exhibit 1: Eurozone purchasing managers’ index (PMI) fell further in Q1 2019Source: Haver, as of March 2019
Exhibit 2: Forward-looking PMI - new ordersSource: Haver, as of March 2019
Exhibit 3: Hard data vs. soft data – manufacturing sectorSource: Haver, as of March 2019
Exhibit 4: Consumer confidence indicator remains above its historical averageSource: Bloomberg, March 2019
This is an extract from the Q1 2019 Inflation-Linked Bonds Outlook published in March. To read the full version, click here > For more articles by Cedric Scholtes, click here > For more articles by Jenny Yiu, click here > For more articles on the eurozone, click here >