Positive message in August, but slower activity

Economic activity in the Eurozone slowed only slightly in August, with the composite output measure easing to 56.2 from 56.7 in July. Most measures remain comfortably above their long-term averages. Forward-looking services measures such as new businesses and business expectations also rebounded in August. Furthermore, we are encouraged by the further pickup in job creation and another month of expansion in backlogs of work.


5th consecutive month of steady growth in services activity

Business activity in the Eurozone accelerated marginally for the second successive month, rising from 55.8 in July to 55.9 in August compared to a cycle high of 56.2 in May. Similar developments were recorded for business expectations and new business (Chart 1). Companies added to their staffing levels for the fourth successive month (52.0), even if this positive trend has been restricted to core Eurozone economies so far. These better dynamics are consistent with the improvement in optimism from retailers, both in the PMI and European Commission surveys. Eurozone retail sales rose in real terms for the third successive month in July, gaining 0.1% mom (sa); the third quarter is starting positively, with retail expenditure up 0.4% from its second quarter levels.


Composite PMI points to solid Q3 performance

The Eurozone is doing rather well, with the composite PMI averaging 54.3 in July and August after 54.2 in Q2 (Chart 2). However, we expect some slowdown in GDP growth to around 0.3% qoq in Q3 after an exceptionally robust Q2 (+1.0% qoq). Looking ahead to the fourth quarter, growing evidence of a somewhat less supportive external demand backdrop - colder winds from the US - will likely have repercussions on confidence. We expect the Eurozone to experience a longer soft patch around the turn of the year.


Inflation pressures are not on the ECB's radar for now

Composite output prices rose to 50.3 in August suggesting a marginal increase in factory gate prices for the first time since April 2010. Price pressures would need to increase for up to four or five successive months and the index would need to rise towards the 55.0 level for the ECB to conclude that pricing power is returning, in our view. With inflation expectations appearing well anchored, modest job creation and no indications of any rebound in negotiated wages, the Governing Council can concentrate on its task of gradually unwinding its non-standard measures. The sequencing would imply address collateral quality and then interest rates, according to Governing Council member Ewald Nowotny.


Further evidence of the outperformance of the core

Germany (55.6 vs. 54.6) and France (57.4 vs. 57.3) are recording slightly faster growth in the first two months of the third quarter, while Italy (50.8 vs. 52.2) is slowing markedly. The Eurozone peripherals are slowing too, with Ireland (50.9 vs. 51.4) doing better than Spain (49.5 vs. 49.8).

source:

Research report