It wasn’t just Japan’s PMI which overnight printed at a disappointing 47.6, missing expectations and signaling the sharpest decline in operating conditions since December 2012. Overnight Markit showed that the Chinese credit-induced global slowdown is coming far faster than most (if not Morgan Stanley) expected, when the Eurozone flash PMI printed at 52.9, down from 53.0 in April, below the 53.2 expected, and the lowest in 16 months. As Reuters put it, this offers “the latest evidence that a strong acceleration in growth in the first three months of the year was only temporary” and likely
Curiously this happened on the back of stronger than expected PMIs from France and Germany which as Goldman notes, suggests weaker prints in Italy and Spain which are yet to be published.
Goldman’s full breakdown of the Markit report:
- The breakdown revealed a 0.2pt fall in the manufacturing output component drove the decline in the composite figure. The services PMI component was unchanged at 53.1.
- The Euro area manufacturing PMI fell by 0.2pt in May. The manufacturing breakdown showed a 0.2pt fall in manufacturing output, a 0.2pt fall in employment, and a 0.1pt fall in new orders. Within the services PMI, the forward-looking subcomponents (which are not part of the headline services PMI figure) were particularly weak, with ‘incoming new business’ falling 1.0pt, and business expectations decreasing by 2.8pt.
- On a country basis, the German composite PMI was strong, rising 1.1pt, while the French composite figure rose by 0.9pt. The strength in Germany and France combined with a relatively unchanged area-wide figure suggests weaker prints in Italy and Spain, which are due to be released next week.
- Based on historical correlations, a composite PMI of 52.9 is consistent with growth of in the Euro area of +0.3%qoq, just below our judgemental forecast of +0.4%qoq for Q2. That said, the PMIs throughout Q1 were consistent with GDP growth of around +0.3%qoq, yet growth accelerated to +0.5%qoq (initially estimated at +0.6%qoq) on Eurostat’s estimates, and as such we remain wary of drawing conclusions too early in Q2 based on the PMI data alone.
Visually:
As Reuters adds, while essentially stable – and still indicating growth – the reading was the lowest since the start of 2015. It ran against expectations in a Reuters poll, which had predicted a tick up to 53.2 in one of the earliest reported broad indicators of growth during the month.
Markit said the PMI pointed to quarterly GDP growth of 0.3 percent, in line with forecasts in a Reuters survey published earlier this month, but short of 0.5 percent in the first quarter, which was initially reported as 0.6 percent.
The silver lining: individual surveys showed growth in Germany’s private sector accelerated to hit the fastest rate so far this year. French business activity also grew faster than expected, returning to a rate not recorded since before the Nov. 13 attacks in Paris. “That suggests that the PMIs for the other major euro zone economies such as Italy and Spain will be soft when released next week,” said Stephen Brown at Capital Economics.
Looking at the aggregated level, while the headline composite PMI was above the 50 mark that separates growth from contraction, the index measuring prices businesses charge remained below it at 49.0, although that was an increase from last month’s 48.3. This, according to Reuters, may concern policymakers at the European Central Bank who have been battling to get inflation up to their 2 percent target ceiling. Consumer prices fell 0.2 percent in April, despite the Bank’s ultra-loose monetary policy.
Even with price discounting, new order growth slowed and there was no acceleration in activity in the bloc’s dominant service industry. A Reuters poll had predicted an increase to 53.3 but the PMI held steady at April’s 53.1. The manufacturing PMI fell to 51.5 from 51.7, missing the median Reuters poll forecast for 51.9, while an index measuring output dropped to 52.4 from 52.6.
Details in the data hint that there may be little or no improvement in June. Optimism among service firms fell to a 10-month low, with the sub-index plummeting to 61.7 from 64.5, and factory recruitment slowed.
“The flash PMIs provided slight disappointments to the markets,” said Tuuli Koivu at Nordea, who expects 0.3 percent growth in Q2. “However, the negative surprises were only minor ones and do not cause any changes to our GDP growth forecast.”
In other words, it will once again be all up to China once more; although considering it took a $1 trillion credit injection by China to buy the most modest of first quarter economic rebounds, it is questionable if Beijing can repeat this dramatic credit spree, especially after an April new loan report which as we commented just over a week ago, was very disappointing and as we warned, presaged a period of weakness for the global economy, as is now materializing.
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