Executive briefing: Strong service sectors and weak manufacturing
|- Rebounding service sectors create strong job growth and hence inflationary pressure, but central banks have to balance that against expected effects of past tightening.
- Growth has surprised to the upside in both Denmark and Sweden, though for different reasons.
- Nordic housing markets show signs of levelling out, but that might change again.
- In financial markets, Nordic currencies are under pressure, while IT/AI equity is booming and credit markets are very active.
According to PMIs, economies have continued to strengthen in May and the picture of a two-speed economy has become clearer. Globally, manufacturing continues to struggle, in particularly in the euro area where the manufacturing contraction intensified in May, not least driven by Germany. The much bigger service sector, on the other hand, accelerated further, which leaves the impression of a resilient European economy supported by some relief in purchasing power following higher wage growth and lower energy prices. The picture is largely the same in the US, although the manufacturing sector has not weakened as much. However, in Western countries, we estimate that only a small part of the effect of the monetary policy tightening that has taken place is so far visible in the growth picture. In Japan, service PMI reached a historical high in May. The Chinese recovery has overall weakened after a strong rebound in Q1.
Inflation has declined significantly, largely driven by lower energy prices, while food prices have also started to decline. Lower commodity prices and freight rates is pulling business costs lower. However, core inflation remains elevated as tight labour markets continue to push service prices higher. Euro area HICP inflation declined to 6.1% in May from 7.0%, but underlying price pressures remain elevated. We expect service price growth to be underpinned by higher wage growth in Europe. In the US, core inflation remains too high as well, although we have seen some easing signs, as service sector inflation has declined, indicating a somewhat lower price pressure in the part of the economy, which is running particularly hot.
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