Euro Area Research: Catching up with reality
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Taking stock of the latest euro area macro data signals, we conclude that investors should brace themselves for more negative economic surprises in coming weeks.
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We expect GDP growth in Q2 to fall back to 0.2% q/q, as exports and investments are prone for a correction, while PMIs should be in for another round of declines in Q3. This should support the ECB's narrative that further stimulus is warranted.
The past few months have seen a steady rise in the euro area surprise index in an environment where expectations were at very depressed levels and central banks stepped into the game by signalling further easing ahead. This begs the question of whether this recent uptrend can be sustained or whether markets are in for an ugly surprise from the hard economic data for Q2.
As the ECB gets ready to prop up the economy with another easing package – possibly in coming weeks (read our take in ECB Research – New ECB call – rate cut and restart of QE, 18 June, here) – economic data shifts back into the limelight as the key determinant of how decisively and timely central bankers will act. Taking stock of the latest euro area macro data signals, we conclude that Q2 will be soft, supporting the ECB's narrative that further stimulus is warranted.
An important factor behind the latest uptick in the euro surprise index has been the seemingly bottoming out of PMIs that has defied analysts' expectations of a further fall in light of the re-escalating trade war. The latest improvement in the PMI new orders component has coincided with a slight rebound in global trade volumes. As the latter has already started to fall back – and will probably do so even more once the full brunt of the tariff hikes is reflected in the data – we expect manufacturing PMIs to be in for another round of declines in the coming months. This message is also borne out in our quantitative business cycle model MacroScope, which predicts further downside in euro area PMIs ahead.
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