Global Macro Weekly Digest (Issue 102):Eurozone November PMI should show decent expansion,reflecting

The Eurozone, as well as Germany and France, will release their November composite PMI flash data on Thursday (November 23rd). As the first major economic data point for November, the readings would be important indicators for the Eurozone growth in 4Q17. As the recent data on business sentiment, GDP growth, and unemployment all suggested continued improvements in the Eurozone economy, we expect the November PMI data to show decent expansions which should point to around 0.6% QoQ growth for 4Q and an annual growth of above 2% this year.

    Composite PMI in the euro area has stayed above 55 ever since February. The final October reading was at 56.0, the 52nd straight month in expansion. Despite the slowdown in service activities, both manufacturing and service PMI stayed above 55, with manufacturing PMI reaching 58.5, the new high in the post-recession period. Specifically, key sub-indices showed continued improvements in output, employment and inflationary pressures: aggregate new orders growth stayed at 6-month peak; employment recorded its sharpest increases in almost ten years; and price pressures continued to build, with both input and output prices climbing to a 7-month high. Also, the November business optimism remained elevated, extending the trend from October. Thus, our prediction is in line with the market forecast: the November PMI should remain broadly stable above 55, and such a solid reading would imply a 0.6% QoQ growth in the final quarter of this year.

    Our previous forecast at the beginning of this year was that the US would outstrip its advanced economy rivals in 2017, driven by the economic stimulus promised by Trump and the Republican Party’s control in Congress. But the Trump effect was surprisingly feeble in 1H17, and only gained momentum recently with the tax reform bills released and passed by the House. Instead, the economic story for most of 2017 has been the euphoric Eurozone. Economic growth in the euro area is now expected to reach the post crisis high at around 2.2% YoY this year, comparable to that of the US, with unemployment rate falling to an eight-year low of 8.9% in September. In our view, the main reasons for the robust economic performance include: 1) the ECB’s ultra-loose monetary policy has successfully boosted domestic demand; 2) unlike other advanced economies, the recovery in euro area is based on two crises instead of one, and the low base suggests more room to expand before triggering worries of rising inflation; 3) political risks have significantly diminished as mainstream / pro-EU parties succeeded in key elections this year.

    Looking forward, while such positive momentum is expected to continue with both monetary and fiscal policies remaining accommodative in the foreseeable future; there still exists notable slacks and headwinds that could take toll on Eurozone’s growth. Firstly, the remaining slack in the labor market and slow productivity growth may continue to constrain wage dynamics, dampen inflationary pressures and could drag private consumption growth. Secondly, debt levels within the region remain high, with continued presence of financial fragilities stemming from the crisis. Thus, if a stronger US growth momentum or inflation development (possibly caused by the tax reform) triggers a faster monetary tightening than currently expected, the associated rapid increase in risk premium and financing costs could be more substantial for Eurozone countries due to the high debt ratios. Finally, the uncertainty related to the Brexit process still remains, which could have negative impacts on investment decisions. Also, any worse than expected outcome for the UK could lead to the appreciation of the euro, posing downside risks to Eurozone’s growth.

    In sum, given the recently stable growth momentum of the Eurozone, we expect the upcoming PMI data to show continued expansions, which could lead to a decent growth of above 2% YoY in 2017. However, we are still somewhat cautious towards the outlook, as the remaining slacks could take a toll on the Eurozone economic growth.