Euro area: Higher PMIs confirm our view of a stronger recovery

The euro area composite PMI increased to 53.5 in February from 52.6 in January and is now at the highest level since summer last year. The increase was driven by the services PMI, which rose to 53.9 from 52.7 whereas the manufacturing PMI was almost unchanged at 51.1.

For the manufacturing PMI the details were better than the headline figure. First, new orders increased a bit, driven by higher export orders. Added to this, there was a decline in stocks of finished goods implying the order-inventory balance increased. This now points to an increase in manufacturing PMI going forward.

The stronger services PMI was driven by higher future business expectations and incoming new business, but there was also an increase in backlog of work. The services PMI employment index increased to the highest level since May 2011.

The increase in services PMI is likely to reflect the boost to private consumption from the decline in the oil price and it suggests private consumption will increase further in Q1. Based on solid retail sales in Q4, we think it was the main driver behind higher GDP growth in Q4.

The improvement in the PMIs and the signal that manufacturing PMI could increase further is in line with our view that euro GDP growth will be strong in Q1. For 2015 we expect GDP growth of 1.5% which is above consensus at 1.2%.

Our view reflects the fact that euro GDP growth is supported by a number of factors: 1) geopolitical uncertainty has faded 2) private consumption is being boosted by the decline in the oil price 3) credit is cheaper and more accessible 4) exports are supported by the weaker euro 5) growth in exports markets is decent and 6) the fiscal headwind has faded.

Germany: Composite PMI also increased to the highest level since summer, confirming the latest signals that the German business cycle has turned.

Services PMI for Germany continued to increase in February, rising to 55.5 from 54.0 in January. The increase followed the January flash estimate being revised up in the final release, in a sign of progress during the month.

The higher services PMI was driven by incoming new business, but also an increase in the backlog of work. The employment index also rose in February, to 54.6, and is now at the highest level since the beginning of 2012.

For the German services PMI, input prices have trended lower in the last four months, but output prices have been more stable and rose above 50 in February.

Manufacturing PMI was unchanged at 50.9. There was an increase in new exports orders, but overall new orders were unchanged in February. Stocks of finished goods were a bit higher, but the order-inventory balance still points to a small increase in manufacturing PMI.

In France, services PMI was very strong, increasing to 53.4 in February from 49.4 in January, and is thus at its highest level since 2011.

The increase was driven by higher incoming new business and future business expectations, while the employment index also increased above 50 for the first time since 2013. However, some of the increase was also due to higher backlog of work.

As mentioned above, this likely reflects a boost to private consumption in Q1. In Q2 it only increased 0.2% q/q, hence it seems that the impact from the oil price decline will come with a lag in France.

French manufacturing PMI declined to 47.7 in January from 49.2. The decline reflected lower new orders, which was driven by weaker domestic orders, as new export orders only declined a bit.

On a positive note, some of the decline in the manufacturing PMI was due to lower stocks of finished goods, which implied the order-inventory balance increased considerably, suggesting manufacturing PMI will increase.