Europe: July’s PMI heralds the end of recession

July 24th's flash PMI surveys for Europe tend to confirm our longstanding scenario of an end of the recession in the third quarter.

In July, euro area flash PMI surveys, based solely on Germany and France extended their upward trend and came in stronger than expected. Indeed, the flash euro area manufacturing PMI increased from 48.8 in June to 50.1 in July, above consensus expectations (49.1). Moreover, the flash euro area services PMI rose by 1.3 to 49.6 in July, much better than consensus expectations (48.7). As a result, the euro area composite PMI which aggregate both sectors, rose from 48.7 in June to 50.4 in July, the fourth improvement in a row. Therefore, the composite index inched above the 50 “no-change” level for the first time since January 2012.


Manufacturing leads the sentiment improvement
The improvement observed in the euro area manufacturing PMI was widespread with all components showing a monthly gain. In particular, output jumped by 2.4 to 52.3 and increased for the third month running, while new orders gained 1.1 to 50.4, the first reading above the 50 threshold since May 2011. The upward move in new orders was mainly due to the export markets, as the new export orders subcomponent increased by 1.8 to 50.9, wiping out the previous monthly loss.


In terms of countries, Germany and France flash manufacturing PMI showed healthy monthly gain in July, both above consensus expectations. Indeed, the German flash manufacturing PMI improved significantly from 48.6 in June to 50.3 in July, mainly due to a remarkable rise in output component. In France, the index picked up by 1.4 to 49.8 in July, the sixth consecutive monthly improvement in a row.

Further improvement in services sector
In the services sector, the upward move was broad based as well, with new business leading the rise. In terms of countries, both Germany and France recorded an increase in July.


PMI readings signal the end of recession in the third quarter
Today’s PMI surveys confirm the ongoing improvement seen recently in business surveys (EC surveys, Ifo) and hard data (Industrial production, retail sales). Beyond the uncertainties regarding Q2 outcomes, this suggests that the euro area economy as a whole may exit recession in Q3, although the recovery remains fragile due to several headwinds, in particular the ongoing deleveraging process, Chinese slowdown and political instability. Today’s outcomes tend to confirm our longstanding scenario of an end of the recession in the third quarter and we are therefore maintaining our euro area GDP forecast of -0.7% for 2013.




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