CHART OF THE WEEK
The high levels posted by the eurozone PMI (1) indices over summer have given way, according to October’s flash survey data, to a significant fall: the composite PMI fell 1.4 points to 52.7, a level indicative of growth between 1.0–1.5%. The index has not been this low since the end of 2016.
Although France proved resilient, actually moving slightly higher, Germany fell quite sharply (-2.3 to 52.7) and the rest of the eurozone is also under pressure. Manufacturing has been hit particularly hard. After breaking through 60 in December 2017, the manufacturing PMI now stands at just 52.1.
OUR ANALYSIS
The manufacturing sector’s difficulties seem to be stemming mainly from the automotive sector, which could explain the deterioration in Germany. The Worldwide Harmonised Light Vehicle Test Procedure (WLTP), which became binding on September 1st, appears to have caused sector-wide disruption. Car registrations shot up 20% in August as non-WLTP certified models were put on the road before the switch-over date from the old tests. They plummeted by 37% a month later. If the latest German production figures are any indication, car makers appear to have reduced production drastically, in line with the sales fall. German car production for August and September was 27% lower than for the same two-month period in 2017.
Other factors may also have dragged on activity in the sector, such as the trade tensions and softer Chinese demand. On a positive note, however, the IFO (2) index has been showing a rebound over the past two months based on manufacturers’ expectations for demand.
PMI (1): Purchasing Managers’ Index, an indicator of economic health for manufacturing and service sectors
IFO (2): monthly business climate index released by the IFO Institute for Economic Research
The opinion expressed above is dated 24 October 2018, and liable to change.
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