Euro area: recession likely to prevail throughout the first half of the year

The euro area’s manufacturing PMI data shows a worrying weakness in economic activity at the start of the second quarter. The region appears well entrenched in recession and recent data on Germany suggest that weakness is spreading in core countries as well.

Manufacturing PMI worse than expected
For the second month running, the manufacturing PMI showed a decrease. Indeed, the flash euro area manufacturing PMI dropped to 46.5 in April from 46.8 in March, below consensus expectations (46.7). By contrast, the flash euro area services PMI posted a slight rise of 0.2 point to 46.6 in April, in line with consensus expectations (46.5). As a result, the flash euro area composite PMI, which is an aggregate of both sectors was left unchanged on March’s reading of 46.5.

Euro PMI - 24.04.2013-1

Broad based fall in manufacturing component
The decrease observed in euro area manufacturing PMI was broad based with all leading components showing a monthly drop. In particular, the new export orders sub-component and the employment component led the fall. In terms of geographical developments, the French flash manufacturing PMI increased slightly from 44.0 in March to 44.4 in April, above consensus expectations (44.1). As for Germany, the manufacturing index plunged by 1.1 point to 47.9 in April, against consensus expectations (49.0). The breakdown showed that the fall was mainly due to a drop in the output component which recorded its largest monthly decrease since July 2012. With German manufacturing PMI below the 50 threshold for the second month in a row, all euro area countries surveys are in manufacturing recession.

Euro PMI - 24.04.2013-2

German services sector: back in contraction territory
The sentiment was slightly better in the euro area services sector, although the index remain well below the 50 threshold, signaling a continuing deterioration. Indeed, the marginal increase in the services PMI index was not widespread but merely due to the outstanding business component. In terms of countries, German services PMI slipped back into recession territory at 49.2 in April (50.9 in March), the lowest level since October 2012. Whereas in France the services index strongly increased from 41.3 in March to 44.1 in April, but remained low and below euro area average.

Euro PMI - 24.04.2013-3

Weakness at the start of Q2
Yesterday’s data showed a worrying weakness in economic activity at the start of the second quarter. The euro area appears well entrenched in recession and recent data on Germany suggest that weakness is spreading in core countries as well.

All in all, April’s PMIs point to further decline in economic activity and suggest some downside risks to our real GDP growth forecast of 0.0% q-o-q in Q2. Therefore, if a contraction materialises in Q2, overall 2013 GDP growth may be even worse than our already pessimistic forecast of -0.8% (consensus: -0.4%).

Euro PMI - 24.04.2013-4

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