Euroland: PMI at Recession Levels

Overview: PMI fell further in September confirming a picture of a Euroland economy flirting with recession. Composite PMI fell to 47 from 48.2 in August (consensus 47.8, Danske Bank 47.9). The decline was driven by a substantial fall in PMI manufacturing while the service PMI fell only slightly. The report also showed a further weakening in employment while price pressures eased a bit. The balance between orders and inventories continues to be at a very low level and points to further weakness in PMI in the months ahead.

Details: The main driver behind the decline was a marked deterioration in the manufacturing PMI. For Euroland as a whole the index fell from 47.6 to 45.3 - much weaker than consensus of 47.3. The data confirms what we have been seeing in other data such as industrial orders and the German ifo: the industrial sector has seen a very abrupt downturn over the past three to four months. Both Germany and France saw a sharp drop in manufacturing PMI in September. Service PMI moderated slightly from 48.5 to 48.2. Service PMI has shown some signs of stabilisation in recent months. The report also shows the downturn is increasingly spilling over to a weaker labour market. The composite PMI for employment fell from 48.8 to 48.1. On a more positive note the price components eased in both manufacturing and service (see charts overleaf).

Assessment and outlook: The further weakening in PMI confirms a picture of a sharp slowdown in Euroland growth in H2. With leading indicators pointing to a further decline in PMI in the coming months things will only get worse. In combination with easing price pressures this will put increasing pressure on the ECB to ease rates once inflation is in more comfortable territory. Our main forecast is for the ECB to lower rates in March and June next year.

Danske Bank
http://www.danskebank.com/danskeresearch

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