CHART OF THE WEEK
May’s flash PMI indices fell yet again with the composite PMI slipping from 55.1 to 54.1. The fall was broad-based with services down from 54.7 to 53.9 and manufacturing down from 56.2 to 55.5. Germany and France were harder hit than the other eurozone countries.
Although the composite PMI reading remains consistent with growth of around 2%, May’s drop has accentuated the downward shift from the highs of January. Is the downturn cause for concern? We see three possible explanations.
The first is that it may be due to an accumulation of temporary external factors. Whereas weather conditions contributed to weakness at the start of the year, company qualitative survey feedback indicates that multiple mid-week bank holidays probably played a negative role in May. In addition, French strike action might also have been a drag on activity, especially in the services sector. If this is the case, we can expect growth and indices to recover shortly.
The second possible explanation is that the slowdown is of a more structural nature. Eurozone growth has been running above potential for several years (1.5% according to the European Commission), enabling the region to close its output gap in 2018. However, capacity constraints are starting to limit growth rates and some European Commission surveys are hinting at potential bottlenecks. In this scenario, any growth above potential could be an inflation threat.
The third possibility is that demand levels are on a downward trend.
As things stand, with consumer confidence at high levels, we consider this scenario unlikely.
The opinion expressed above is dated 25 May 2018 and is liable to change.
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