Eurozone: Can the euro area decouple? We don’t think so – Danske Bank

The research team at Danske Bank explains that so far, we have yet to see the same signs of a peak in euro business cycle indicators that we are witnessing in the US and China which raises the question whether the euro area PMI can continue to decouple.

Key Quotes

“Euro PMI has continued to move higher and points to robust growth. The economic surprise index in the euro area is also still high. This stands in sharp contrast to the steep fall that has taken place in the US. This raises the question whether the euro area PMI can continue to decouple.”

“We doubt this is the case. Part of the impetus for euro area manufacturing is currently coming from the export sector. This factor is likely to fade, with China slowing down. Euro area private consumption has also faced headwinds from a decline in real wage growth moving into negative territory (due to the rise in inflation) after a period of a decent increases in purchasing power when inflation was 1.5 percentage points lower than wage growth.”

Overall, we look for euro PMI to peak soon and follow the US and China lower. We do not expect a big setback or the recovery to derail but simply believe that the pace will slow a bit. However, in combination with a weaker global backdrop, this means the current very positive picture of the euro area will be less upbeat when we get to the end of the year. With inflation set to decline to around 1.0-1.5% in early 2018, we still believe the ECB will extend asset purchases into the new year but reduce our estimate of the pace to EUR40bn per month.”

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