Germany and the rest of euro area exhibits an increasing divergence

In December, the flash euro area manufacturing PMI expanded by 1.1 points to 52.7, well above consensus expectations (51.9). The improvement is essentially due to German optimism, as the French manufacturing PMI fell further into contraction territory.

Composite PMI: first increase after two month of decline
In December, the flash euro area manufacturing PMI expanded by 1.1 points to 52.7, well above consensus expectations (51.9). By contrast, the flash euro area services PMI continued its downward trend by declining from 51.2 in November to 51.0 in December, below consensus expectations (51.5). As a result, the composite PMI, which is the weighted average of both sectors, inched up from 51.7 in November to 52.1 in December, slightly above consensus expectations (51.9) and partially reversing the two previous months of decline.


Widespread increase in manufacturing components
The increase observed in the manufacturing PMI was widespread as all components posted a monthly rise. In particular, the new orders (up 2.0 points to 54.2) and output (up 1.7 points to 54.8) components inched up significantly. The increase in new orders was essentially supported by domestic demand as the new exports orders sub component remained broadly unchanged in December. The employment component moved closer to stabilisation at 49.9 (up 1.1 points), the highest reading since January 2012.


Increasing gap between Germany and France
In terms of countries, the improvement in this month’s sentiment in the euro area is essentially due to German optimism and again highlights the leading role of German economy in the euro area. In the manufacturing sector, the gap between Germany and France increased to 7.2 points in December, the largest since July 2010. Indeed, the German manufacturing PMI recorded its third consecutive month of increase by climbing to 54.2 in December from 52.7 in November, better than consensus expectations (53.0). The expansion was broad-based across components, with strong rises in employment (up 2.8 points to 50.8) and the new orders component (up 2.6 points to 57.5). In contrast, the French manufacturing PMI fell further into contraction territory to 47.1 in December, compared to consensus expectations (49.0). The decline was widespread across components.

Services sector: losing momentum
In the euro area services PMI, the fall in outstanding business (down 1.4 points to 47.8) and new business (down 0.3 points to 51.3) was partially offset by the slight rises in expected business (up 0.2 points to 59.6) and employment (up 0.5 points to 49.7). In terms of geographical developments, both countries posted a monthly decrease, but the German index still remains in expansion territory.


Divergent signal between hard data and surveys for Q4 activity
The PMIs give a different picture of economic activity than hard data such as industrial production. Over Q4 as a whole, the average composite PMI (51.2) is consistent with a modest growth of 0.2% q-o-q in Q4, whereas industrial production suggests that Q4 could record a contraction. Surveys appear to be a more reliable indicator of the underlying trend of growth, while industrial production better reflects the volatility of the statistics. As a result, the growth in Q4 is likely to be lower than suggested by surveys. All in all, we maintain our forecast of a 0% q-o-q growth in Q4, resulting in a contraction of 0.5% in 2013.




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