The Eurozone PMI Preview: Eurozone needs lower Euro to stabilize the free fall in economic sentiment

• Strong Euro, fear of economic consequences of trade wars and geopolitical risk escalation stand behind sharp deceleration in forward-looking sentiment indicators like PMI.
• The deceleration in the economic activity is set to keep ECB on hold with its asset-purchasing for longer.

The Eurozone purchasing managers indices for April are set to record another wave of deceleration in April after March reading already saw the manufacturing and services activity slowing down sharply. Strong Euro is making the life of the Eurozone exporters harder, while the risk of trade protectionism in combination with the recent escalation of geopolitical risk represents an even heavier economic burden.

The Eurozone composite purchasing managers index (PMI) combining the activity in manufacturing and services sector rose to the highest level in 139-months in January, and the Eurozone was experiencing the most robust start to 2018 in last 12 years.

Now the success story is turning the corner and based on the example of German ZEW index of investors sentiment, manufacturing and services activity is also set to decelerate sharply in April. Reasons behind the negative turn in the economic sentiment are pretty much known:
A strong exchange rate of Euro 
The uncertainty stemming from US-led trade protectionism 
and most recently also geopolitical risk increased after military action of joined forces of the US, the UK, and France in Syria.

Looking at the example of German ZEW index of investors sentiment deceleration is steep and profound. The ZEW Indicator of economic sentiment for Germany for April dropped 13.3 points compared to March and 26.0 points compared to February this year. This is the lowest level of German investors sentiment since July 2016 when uncertainty rose sharply following the UK decision to leave the European Union.  The ZEW indicator currently stands at -8.2 points, falling far below the long-term average of 23.5 points.

Related stories

• Eurozone manufacturing PMI cools down, remaining strongly on the growth side
• Sentiment in the Eurozone on a free fall

Should the analogy of ZEW index of investors sentiment translate into deceleration of the manufacturing PMI in the Eurozone, we should see the manufacturing PMI dropped from 56.6 level in March to around 52.0 level for April, representing the lowest reading since the third quarter of 2016.

The sharp deceleration in the economic activity is also expected to be echoed in the introductory statement of President Draghi when the press conference after the ECB Governing Council meeting will begin four days later on April 26, 2018. Sharp deceleration of the economic activity is expected to weigh on ECB’s decision to end its asset purchasing as planned this September and Draghi might strike for more cautious tone, leaving all options available. 

With Euro depreciating either as a result of manufacturing and services PMI falling sharply lower or the ECB’s reluctance to tell the world the truth about its asset purchasing intentions, the basis for sentiment stabilizing will reemerge. Because in fact, it is the Euro’s exchange rate that is the automatic stabilizer of any macroeconomic imbalances, even with the ECB still purchasing assets from the market.