Signs of higher growth and inflation in the euro area
Surveys that show activity remains buoyant in the euro area mean growth and inflation could be higher than forecast, thus complicating the ECB’s task.
Flash purchasing managers’ indices (PMI) for November, compiled by Markit, delivered upside surprises across most countries and sectors in the euro area.
Business confidence remained very strong in Germany, and improved markedly in France and peripheral countries. The euro area composite PMI rose to 54.1, pointing to real quarter-over-quarter (q-o-q) GDP growth of at least 0.4% in Q4, slightly above our forecasts. We are leaving our euro area GDP growth forecasts unchanged at 1.6% for 2016 and 1.3% for 2017, but on the basis of such forward indicators upside risks are building.
Importantly, PMI components reflected upward price pressure, including the largest rise in output prices since 2011. This pressure is likely to intensify further in the coming months, according to Markit. Stronger growth, order books and a gradual decrease in labour market slack all suggest that price pressures “look set to intensify further in coming months”, it said.
The implications for the ECB could be significant although the probability remains tilted to the downside as the central bank remains deeply concerned about risks to core inflation. Today’s PMI may eventually help shift the balance of risks, providing we see continued evidence of ‘global reflation’. However, we still expect the ECB to extend quantitative easing (QE) by six months at its December policy meeting and to adjust QE parameters to seek maximum flexibility.
The flash composite PMI index for France increased in November, mainly due to services, and looks consistent with real GDP growth of around 0.3% q-o-q in Q4, based on the average for October & November, following 0.2% growth in Q3. The composite PMI reading for Germany declined marginally in November, but both PMI headlines and subcomponents continue to reflect strong underlying momentum in the domestic economy, confirming the Bundesbank’s expectation of “significantly stronger” GDP growth in Q4 following a disappointing 0.2% q-o-q increase in Q3. The German economy could rebound by around 0.5% q-o-q, with risks tilted to the upside.