Euro PMIs continue to indicate solid domestic demand

The euro PMIs in August were a bit weaker than expected, but the service PMI remained high at 53.5 in August (down from 54.2 in July), while the manufacturing PMI declined to 50.8 in August from 51.8 in July.

Overall, the figures continue to show that the domestic-driven service sector is doing very well, whereas the manufacturing sector, which to a larger extent is affected by geopolitical uncertainty and a lagged impact of weak foreign demand, is the weak link. However, manufacturing PMI remains above 50 and points to expansion.

The composite PMI new orders increased marginally to 52.9 in August from 52.7 in July and continue to indicate GDP growth around 0.4% q/q. This is much stronger than in Q2, where the euro area economy stagnated mainly due to temporary factors.

Looking at the details, manufacturing PMI new orders continued lower to 51.0 in August from 51.9 in July. New export orders also went lower but only declined to 52.1 in August from 52.6 in July. New export orders have stabilised since May having declined at the beginning of 2014. We continue to believe the strong growth in the US in Q2 will affect the euro area with a lag and we expect a larger contribution to growth from exports going forward.

For service PMI, future business expectations declined to 58.6 in August from 61.3 in July, but is still at a very high level. Incoming new businesses increased a bit and are now at the highest level since mid-2011.

The manufacturing PMI employment index declined to 49.1 in August from 50.3 in July. This is the lowest level since November 2013 and could reflect a wait-and-see mode due to the geopolitical uncertainty. For service PMI, the employment index has trended slowly lower since May, but it remains above 50. This also suggests that it is mainly export-oriented firms that are postponing decisions to hire new workers.

The German PMIs declined a bit, but were stronger than expected. The composite PMI remains around 55 and clearly points to a rebound in German activity in Q3 after the contraction in Q2. Stocks of finished goods and stocks of purchases increased in August and the order-inventory balance points to a decline in the German manufacturing PMI going forward. This could reflect that the slowdown in the US and China in Q1 came as a surprise to the German manufacturing sector and thus resulted in larger stocks.

French PMI manufacturing was weaker than expected, but service PMI increased further. Overall, this suggests that domestic demand is OK even in France, where a lack of structural reforms remains a challenge. Some of the decline in manufacturing PMI followed as stocks of finished goods and stocks of purchases declined in August. The declines imply that the order-inventory balance has increased suggesting that manufacturing PMI will start to increase.