The Eurozone Purchase Managers Index (PMI) preliminary figures are out for February, and continue to show deceleration with the EZ Composite now at 52.7 (down from 53.6 in January). While some deceleration was expected, the fall was widespread across both countries and sector – only in the German services sector were expectations surpassed. The periphery also appears to be holding up in better shape, which we believe is not surprising given their smaller focus on manufacturing.
Looking more closely, manufacturing activity has moved closer to stagnation across France and Germany. Services are doing better in Germany thanks to robust domestic demand (on the back of low oil, refugee related public spending and a solid labor market) but still saw the weakest growth since January 2015. In addition, leading indicators such as new orders and optimism about future activity fell, suggesting that the trend for the next few months is downwards.
At these levels, the PMIs are consistent with growth of around 0.3% quarter-over-quarter in the Eurozone as a whole (0.4% quarter-over-quarter in Germany), broadly in line with the previous quarter and around potential. So far, however, surveys have overestimated the actual growth pace, signaling risks are to the downside.
All in all, we believe this reading supports the case for robust action from the European Central Bank (ECB) in March. This is likely to include a further cut to the deposit rate, and potentially expansion to the QE (Quantitative Easing) asset purchase program.
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