The first eurozone composite Purchasing Manager’s Index reading for February came in at 52.7, falling short of the 53.1 that economists had called for. However, the services component of the index has improved by-and-large in most countries over the past few months and the latest reading (51.7 versus forecast of 51.9) is consistent with that, said Gilles Moec, European co-Chief Economist at Deutsche Bank AG.
The services sector improved faster because fiscal austerity is probably not as tough now as it was 2-3 years ago. There has been some normalization of domestic demand, which is reflecting in the services data. On the manufacturing front, things are a little more difficult though because it depends a lot on the type of traction available outside Europe.
Investors could be tempted to read the small dip in German manufacturing PMI as an indication of what’s going on in China (Chinese manufacturing PMI slipped deeper in the contractionary region for the second straight month in February). However, prudence is required since the relationship between German and Chinese manufacturing PMI is not linear though it’s a possibility.
The recent data flow from across the world has been pretty erratic. Nobody knows if US data indicates a genuine economic slowdown or a winter-induced deceleration. Similarly, data coming out of China could indicate a seasonal adjustment around the lunar year or a genuine dip in exports demand. In Europe, investors are not sure if they should focus on positive data from Germany or not-so-positive data from France, i.e. very wishy-washy data flow, he noted.
Asked how the European Central Bank would read this data, Gilles said there’s fodder for everyone in the data points. The small dip in composite PMI could be a signal that the speed of recovery has hit a plateau, about a quarter-point per quarter, which would not be enough to plug the upper gap to get the economy out of deflationary pressure.
Alternately, the data can be construed as an aberration to the recovery story with the overall upward trend remaining intact. There should be some pricing power gradually creeping into the economy since inflation pressure is not that high. However, the indecisive data flow could be an issue for the ECB. It failed to make any decision last month due to lack of clarity in economic data, he noted.
Asked to comment on the International Monetary Fund’s role in influencing ECB policy, Gilles said IMF has limited influence on ECB’s monetary policy decisions. However, the IMF’s role was absolutely crucial in fiscal policy decisions. The IMF single-handedly started the fiscal austerity revision process in Europe two years ago.
Without the IMF’s intervention, there would have been more painful structural adjustments and unrealistic fiscal targets could have been imposed on countries. The ECB could have done more on the monetary policy front since the central bank needs to make a judgment call and just can’t afford to wait for clear data before making the next policy move.
There’s no doubt the economy in the euro region is improving, but the speed of the recovery remains slow. More safety nets are required since the downside risks remain massive. The ECB Governing Council moves pretty slowly although sometimes they initiate action based on just a few data points. They are not initiating any action right now because probably they don’t see any smoking gun, he concluded.
You can watch the video here.
Contact Ulli