PMI Keeps ECB on Track to Withdraw Stimulus
Tuesday, 24 July 2018 16:38 WIB | EUROPE |PMI

The euro-area composite PMI survey provides additional evidence the bloc's economy has recovered from the slowdown at the start of the year, though there's little chance of a return to the heady rates of expansion posted in 2017.

That should leave the European Central Bank on track to finish its asset purchases in December and begin a tightening cycle the following September.

The composite headline fell to 54.3 in July from 54.9 in June, missing the consensus forecast of 54.8.

The latest print points to GDP growth expanding by 0.5% quarter over quarter in 2Q.

This is the first reading for 3Q. It stands below the 2Q average of 54.7. That can be read in two different ways. The level posted in July suggests the economy is on track to expand by 0.5% in the present quarter. And the change in the average from the previous quarter indicates a deceleration of 0.1 percentage point.

Both of those interpretations are consistent with our forecasts. We expect GDP growth to decelerate to 0.5% in 3Q from 0.6% in 2Q.

The latest published figure is for 1Q -- it came in at 0.4%. That was weighed on by temporary factors such as cold weather, strikes and widespread influenza. We expect an acceleration of 0.2 ppt as activity returns to more normal levels.

However, there™s very little spare capacity left in the economy and it can™t sustain a rate of growth that high forever. We expect a 0.1 ppt deceleration in 3Q before the economy settles down to 0.4% for the next several quarters. The forward-looking component of the survey -- new orders -- also supports that outlook. The figure for July stands 0.8 point below its 2Q average.

The outcome of the PMI is in line with the signals coming from other surveys. Euro-area consumer confidence and the current assessment component of the German ZEW both fell in July from their 2Q averages. The German Ifo will be published tomorrow.

Source: Bloomberg


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