Euro area: Early signs of upside risks - PMI GDP indicator shows a bounce close to flat growth for Q1 12
 
In the wake of stronger-than-expected releases in the two largest economies of the euro area, particularly in Germany, the euro area "flash" composite PMI improved 2.1 points to 50.4 in January, thus coming back above the 50-threshold for the first time since August 2011. The breakdown of the composite index highlights a significant divergence between the output related component, which rose 2.1 and 1.8 points to 50.4 and 47.8 (for output and new orders respectively), while the employment index declined 1 point to 49.4, the lowest level since March 2010, and pointing to outright job losses in the overall economy. Otherwise, the input price index rose to 55.5 from 54.0 while output prices were reported to drop further at 49.6 after 49.8. Apart from the small slip in the French manufacturing sector, all other headline indices rose and actually showed stronger improvement than what we and the consensus had expected.
 
All in all, this is genuinely good news for euro area growth prospects, and confirms our view that Q1 12 should be better than Q4 11. According to our PMI based GDP indicator, using the January print as the overall average for Q1, it now points to a broadly flat print for euro area GDP in Q1 (up from -0.3% q/q estimated with the December PMI for Q1). Today's outturn therefore generates some early upside risks to our baseline scenario of a 0.2% q/q GDP fall in Q1, nevertheless up from -0.3% q/q projected in Q4.
 
 
At the sector level, the manufacturing and services sector made similar improvements, rising 1.8 and 1.7 points to 48.7 and 50.5 respectively. In the manufacturing sector, the new orders-inventories index (as shown in the chart below), jumped to a similar extent as last month, from -3.8 to -0.9, the highest reading since June 2011. Otherwise, the output index and the export new orders both rose 2.8 points to 50.0 and 48.2 respectively. While output in the industrial sector might actually contribute to growth as soon as next month, the new orders components (total and export) still remain fairly well anchored in contraction territory at 46.4 and 48.2 respectively. As seen in the German and French data, there is a notable difference in level in these last two indices suggesting that domestic demand is to be more severely hit than external demand. We view this as the result of the fiscal consolidation and the recent loss in business confidence - and still lack of it - which are likely to generate a tepid private consumer outlook, via a rise in unemployment (as evidenced by today's composite employment print) but most importantly - at least in the short term - also a severe contraction in overall investment (also the result from increasing financing costs).
 
On the price front, input prices rose markedly by 3.5 points to 52.7, indicating upside price pressures since September 2011. In the meantime, output prices index remained broadly unchanged at 50.9, suggesting little price pressure on the consumer.
 
In the services sector, gains were reported in all business related components as the outstanding, new and expected business increased (by 0.5, 1.4 and 2.4 points to 47.9, 48.5 and 56.0 respectively). On the negative side of things, the employment index declined 1.7 points to 49.0, dropping below the 50-breakeven for the first time since April 2010.

source: BarCap