Higher euro PMIs and German ZEW expectations

Euro area flash PMIs increased in December and were slightly stronger than consensus expectations. The improvement in PMIs was broadly in line with our expectations and confirms our view that growth in the euro area will slowly strengthen in 2015 after it lost momentum during 2014.

The euro composite PMI new orders increased to 50.9 in December from 49.7 in November. The improvement followed after it had declined each month since June, and we believe it will trend higher in coming months, along with other signs of improvement in business climate indicators.

The manufacturing PMI increased to 50.8 in December from 50.1 in November. Both new orders and new export orders improved, but the overall increase in new orders was mainly due to domestic demand as new export orders strengthened less.

The order-inventory balance continued to close the gap from October and it no longer suggests companies need to work off high inventories going forward, hence manufacturing PMI should continue to increase on the back of stronger orders.

The service PMI increased to 51.9 from 51.1. The details were a bit mixed as incoming new business increased above 50 again, whereas future business expectations declined to 58.3 from 59.6, but are still at a very high level.

In Germany, the manufacturing PMI increased to 51.2 in December from 49.5 in November, but the service PMI continued lower to 51.4 in December from 52.1 in November after it peaked at 56.7 in June. The increase in manufacturing PMI was mainly due to stronger domestic orders as new orders increased to 51.0 in December from 47.1 in November. The German order-inventory balance was a bit weaker in December, but the current level does not indicate companies need to work off high inventories. For service PMI the details were weak and incoming new business declined below 50 for the first time since June 2013.

German ZEW expectations were also released today, increasing to 31.8 from 11.5, and they are now at the highest level since May, reflecting that a large share expect future improvement. The increase in ZEW expectations also suggests that the IFO expectations due for release on Thursday will be higher in December. We expect the German economy will strengthen in 2015 and look for GDP growth of 1.9% up from 1.5% in 2014.

In France, the manufacturing PMI declined to 47.9 in December from 48.4 in November, which is the lowest level since August, while the service PMI increased to 49.8 in December from 47.9 in November. However, for the manufacturing PMI the details suggest stronger domestic demand as new orders increased while new export orders decline. At the same time the order-inventory balance improved after having been very weak recently.