Euro PMIs suggest higher activity in H2

Euro services PMI was stronger than expected in July and increased to 54.4, from 52.8 in June. This is the highest level in more than three years and as services are driven mainly by domestic demand, it signals that euro demand continued to strengthen in H2.

The increase in the services PMI came even though consumer confidence declined for the second month in a row in July. Although the latter has declined a little, it is still at a very high level (above the peak in 2010-11) and it continues to suggest upside risk to our forecast for private consumption in the euro area.

Manufacturing PMI continued to be weaker than the service component and it was almost unchanged at 51.9 in July compared with 51.8 in June. Nevertheless, the underlying components give encouraging signs of a higher index going forward. The new exports orders index increased for the first time since January, which should reflect the latest economic improvements in the US and China. There is usually a lagged effect and as Chinese manufacturing PMI has increased for three consecutive months, we expect a further increase in euro manufacturing PMI going forward.

The combination of solid domestic demand and strengthening global growth implies that economic activity in Europe should strengthen further in H2, when we expect a quarterly growth rate around 0.5%.

The figures released today also indicate that the expected weakening of activity, particularly in Germany, in Q2 should be temporary. The German manufacturing PMI increased to 52.9 in July, from 52.0 in June, while the services PMI was 56.6, up from 54.6 in June. Part of the slower growth in Q2 in Germany can also be explained by the mild winter, which boosted growth in Q1.

In France, the services PMI increased to 50.4 in July, up from 48.2 in June, while manufacturing PMI declined further to 47.6, down from 48.2 in June. For manufacturing, new export orders increased for the first time since March but new orders declined again. This implies domestic orders declined, reflecting the weak economic situation in France, where reforms are still needed to avoid a long period of very low economic activity.