Eurozone flash PMI: Business confidence firms in May

May 31, 7:12 am
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Peter Praet, executive board member and chief economist of the European Central Bank. Image via ECB.

Summary:

  • Eurozone recovery continues to expand
  • Flash PMI’s for May in the eurozone stable as regional PMI’s advance
  • Germany continues to spearhead growth with Ifo business climate advancing
  • German GDP growth seen rising 0.6% on a quarterly basis
  • ECB officials reiterate no change to policy while acknowledging a pickup in growth

The eurozone’s purchase manager’s index released last week continued to signal growth momentum in the region, consistent with ECB’s Mario Draghi calling the assessment as “solid and broad.

The eurozone composite flash PMI, released by Markit, was stable at 56.8 in May.

The preliminary data showed that growth in the Eurozone’s two of the largest economies continued to advance with the manufacturing sector posting the biggest gains.

The markets are currently looking at any evidence from the ECB officials to tone back their dovish rhetoric, although there have been subtle signals from the central bank which as acknowledged the pick-up in the recovery of the region.

Germany spearheads Eurozone growth

Germany quarterly GDP growth: 0.6%, Q1 2017
Germany quarterly GDP growth: 0.6%, Q1 2017

The positive string of data was not just limited to the flash PMI’s but also better than expected numbers from the German Ifo business climate data as well as the quarterly GDP numbers.

Business sentiment, as measured by the Ifo Institute showed another month of expansion. The Ifo business climate index rose to 114.6 in May, up from 113.0 in April. The index was already at record highs since record keeping started in 1991.

The Ifo president, Fuest said that the economic activity in Germany continued to remain brisk with manufacturers planning to ramp up production.

The upbeat numbers were also confirmed by the Gfk consumer climate in Germany. Data showed that consumers were happy with their finances pushing the June consumer sentiment indicator to 10.4 points, up from 10.2 points in May. The data beat economists’ expectations of 10.2.

The rapid pace of economic activity pushed the first quarter GDP growth to 0.6% with growth supported by an increase in investments and exports. The German statistics office, Destatis showed that exports rose 1.3% on the quarter while imports jumped 0.4% during the same period.

The private sector also posted a sharp jump, rising at the fastest pace in over 6-years, data from IHS-Markit showed last week. Germany’s manufacturing PMI rose to 59.4, rising by one point suggesting that growth was likely continuing at a firm pace. The services sector, however, eased, slipping to 55.2.

For the remainder of 2017, the German economy is expected to rise 2.0%

ECB President Draghi reiterates monetary policy

The European Central Bank’s president, Mario Draghi spoke last week, and despite mounting pressures on the ECB to scale back its easy monetary policy, the central bank chief reiterated that monetary policy would not change.

Quashing hopes for any early changes to tighten monetary policy, the ECB president said that despite the risks from negative interest rates, the downside was limited.

According to Draghi, the currency assessment of the monetary policy suggested that there was no reason to deviate from the central bank’s (loose) monetary policy.

The central bank has come under pressure from lawmakers across the Eurozone as well as from within, to do more to scale back on its easy monetary policies.

The ECB’s chief economist, Peter Praet who also spoke last week alongside a number of other officials, however, said that the central bank would consider updated economic forecasts when it meets next in June.

Praet, however, noted that the recovery in the eurozone hinged on the ECB’s monetary policy stimulus and its forward guidance.

The euro has surged to fresh 6-month highs against the US dollar over the past few weeks with most of the optimism coming from the prospect that the ECB could very well begin to tighten monetary policy.

The central bank could be seen taking a major decision when it meets in June where the forward guidance could potentially prepare the markets for a tighter policy regime.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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