Eurozone: Strong PMI figures signal strengthening recovery - ING

Peter Vanden Houte, Chief Economist at ING, suggests that after strong consumer confidence figures yesterday, the flash Eurozone PMI for November was also better than expected.

Key Quotes

“Growth is accelerating, while deflationary pressures seem to have abated. But that won't withhold the ECB for announcing a lengthening of its QE program in December.”

“It seems as if the election of Donald Trump is another non-event for the European economy after the Brexit referendum failed to dent business sentiment. The flash composite PMI for the Eurozone increased in November to 54.1 from 53.3 in October. This was clearly better than expected and reflects the strongest monthly increase in output since December 2015.”

“The improvement was largely due to the service sector, seeing the activity index improve to 54.1 from 52.8 in October. The PMI indicator for Manufacturing fell back slightly, but still printed a strong 54.1. Germany remained robust, while growth picked up in France. Elsewhere in the Eurozone activity accelerated to the highest level in 10 months. The current PMI level is compatible with 0.4% quarterly GDP-growth, a slight acceleration of the growth pace in the Eurozone.”

“Forward looking indicators suggest further improvement with both order book volumes and hiring intentions standing at very high levels. At the same time there are signs that deflationary pressures have abated, as prices charged rose for the first time since August 2015. While still marginal, it was nonetheless the largest price increase since August 2011.”

“Today’s PMI mirrors the surprisingly strong consumer confidence figures for November, published earlier this week. This seems to indicate that the Eurozone has clearly embarked on a self-sustaining recovery. That said, it is still too early to anticipate a significant acceleration of the growth pace. While financial markets have reacted positively to the outcome of the US elections a lot uncertainty on future policy remains in place. On top of that, Europe has its own political hurdles to pass over the next 12 months, with elections in several key countries and the Italian referendum on 4 December.”

“The ECB hasn’t given the all-clear sign on the recovery either, with Draghi stating that the expansion is still highly reliant on monetary policy stimulus. In that regard we think that the ECB will err on the side of caution when considering its next policy moves. The bank probably still remembers its premature tightening in 2011 and wants to avoid the same mistake now. While we believe that interest rates will not be lowered any further, we remain convinced that a lengthening of the QE programme will still be announced in December.”