The euro area’s PMI survey indicates a soft entry point in the fourth quarter

The euro area’s PMI release appears to be in line with our scenario of positive, but subdued growth. We maintain our 0.5% GDP contraction forecast for 2013 as a whole.

After six consecutive months of improvement, the euro area flash composite PMI decreased from 52.2 in September to 51.5 in October, while the consensus had expected further improvement (52.4). It is worth noting that today’s fall merely offsets the previous month’s increase and the index is still higher than it was at the beginning of the year. The decrease was driven by the services sector, where the euro area flash services PMI fell by 1.3 points to 50.9 in October, well below consensus expectations (52.2). By contrast, the flash manufacturing PMI edged up slightly from 51.1 in September to 51.3 in October, in line with consensus expectations (51.4).


Output component led the rise in manufacturing sector
The increase observed in the manufacturing sector was mainly due to the output component, which inched up by 0.7 points to 52.9, whereas the new orders component remained stable at 52.1 and employment (-0.3 points) fell further into contraction territory.


In the services sector, the decrease was primarily driven by a significant fall in expected business (-2.0 points to 58.2). This came after the component reached an 18-month high in September. Moreover, the employment component (-1.1 points) fell back into contraction territory, whereas the new business (-1.5 points) component decreased to its August level of 50.3.

Improvement in euro area manufacturing sentiment driven by Germany
In terms of geographical developments, euro area manufacturing sentiment continued to be driven by Germany, where the flash manufacturing PMI partially corrected September’s decline. By contrast, the French manufacturing index contracted by 0.4 points to 49.4 in October. As for the services sector, both countries posted a monthly decrease, but still remain in expansion territory.


Moderate growth in Q4
All in all, this PMI release appears to be in line with our scenario of positive, but subdued growth. According to October’s PMI, GDP growth in Q4 is likely to remain close to Q3 economic activity, which is likely to come out softer than in Q2. We therefore maintain our forecast of 0.2% q-o-q growth in both Q3 and Q4, resulting in 0.5% contraction for 2013 as a whole.



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