EZ PMIs: data arrives not as assumed; ECB to delay - Nomura

Like many other commentators, analysts at Nomura had assumed that the unexpected slowdown in the euro area in Q1 was driven by temporary factors such as inclement weather, strikes and a bout of sickness in Germany. 

Key Quotes:

"We expected a bounce-back in some key leading indicators of growth in Q2. Unfortunately, however, the incoming data – and today’s flash PMI data for May in particular – are not yet consistent with that narrative. To be fair another temporary factor – and specifically the timing of holidays in Germany – is also now being blamed by the survey compiler for this unexpected weakness."

"We note too that the overall levels of these survey balances are still consistent with a relatively healthy pace of economic growth and specifically around 0.4% q-o-q."

"That being said the broadly based nature of the slowdown and the degree to which this is evident in forward-looking components (e.g. new orders) is a concern. At the very least it suggests downside risks to our above-consensus GDP growth outlook. And it may well prompt the ECB to delay an announcement on its QE tapering intentions from June to July."

"We are not inclined at this stage, however, to throw in the towel on our upbeat mediumterm economic outlook. Downside risks, not least from the flare up of political instability in Italy, have certainly risen. But there are still several fundamental features of the environment that suggest the euro area growth outlook is positive. These include the region’s still loose monetary and financial market conditions, a fading drag from public and private sector deleveraging, alongside a likely further improvement in global growth."

"For the ECB we should also bear in mind the likely boost to both headline and core inflation that will stem from a weaker euro, higher oil prices and tighter capacity pressures."