Euro area PMIs confirm our view of stronger GDP growth in 2015

Manufacturing PMI increased from 51.0 in February to 51.9 in March and is now at the highest level since May 2014 (consensus 51.5, Danske Bank Markets 52.0). The details behind the improvement were good and suggest further progress in coming months. The increase is due to higher new orders, which rose from 51.0 in February to 52.2 in March mainly driven by domestic demand as new export orders increased less. Stocks of finished goods continued to decline, which means the orderinventory balance suggests further improvement in the manufacturing PMI going forward. It currently signals that PMI manufacturing will increase to around 55.0.

The higher manufacturing PMI likely reflects stronger domestic demand in the euro area as uncertainty fades, while exporters benefit from the weaker euro. Improved bank lending is also supporting the recovery, in contrast to previous years. Our model for composite PMI, new orders, which is based on real M1 growth and the effective euro, also suggests the PMIs will continue to increase in coming months.

Service PMI increased from 53.7 in February to 54.3 in March and is now at the highest level since mid-2011 (consensus 53.9, Danske Bank Markets 53.9). The improvement is driven by higher incoming new business, which increased from 52.2 in February to 54.1 in March. The business activity index was also higher and future business expectations increased a bit after a decline in February.

The continued increase in the service PMI likely reflects the boost to private consumption from the lower oil price. Progress was also seen in the improvement in euro area consumer confidence released yesterday. In March, it rose to the highest level since it peaked in 2007 and in line with the retail sales figure it suggests upside risk to our forecast for private consumption in Q1.

German manufacturing PMI increased from 51.1 in February to 52.4 in March (consensus 51.5, Danske Bank Markets 52.0). New orders increased to the highest level since summer last year, rising from 52.8 in February to 51.5 in March mainly driven by higher domestic demand. Stocks of finished goods declined considerably and the order-inventory balance now points to PMI manufacturing around 55 in coming months.

The service PMI increased from 54.7 in February to 55.3 in March (consensus 55.0, Danske Bank Markets 55.0). The higher service PMI was due to an increase in incoming new business from 52.2 in March to 54.1 in February. Business activity and future business expectations also increased in March. On the other hand the employment index was a bit lower and backlogs of work also declined from a relatively high level in February. Other indicators also suggest German economic activity continues to improve after growth that was already strong in Q4 14. This progress in the German economy is important for our view of stronger growth momentum in the euro area.

French manufacturing PMI increased from 47.6 in February to 48.2 in March (consensus 48.5, Danske Bank Markets 48.2). The increase was driven by new orders, which increased to 46.7 from 45.0. New export orders also increased but less than the overall new orders index, hence the improvement is mainly due to improved domestic demand even in France. Stocks of finished goods declined a bit and the order-inventory balance continues to suggest stronger manufacturing PMI going forward.

Service PMI declined from 53.4 in February to 52.8 in March (consensus 52.5, Danske Bank Markets 53.5). The decline in March followed a considerable increase in February and it remained around the highest level since 2011. Added to this, incoming new business remained almost unchanged at 53.6 in March, and the employment index continued to trend slowly higher and in March was slightly above 50 for the first time since mid-2013. Overall, although the composite PMI declined a bit from 52.2 in February to 51.7 in March, it still suggests higher GDP growth in France in Q1. This is in line with our expectation that French private consumption will benefit from the lower oil price and that the full impact has not been seen yet.