September 24, 2012
The PMI composite index for the euro zone fell to 45.9 (46.3 prev.) in September, while the market expected a small rise. The modest disappointment masks the significant dichotomy between France and Germany. The French PMI was down nearly 4 points to 44.1, while the German index rose nearly 3 points to 49.7. Though data for other EMU countries will only be released in early October, the EMU average suggests that non-core countries’ PMIs also fell.
The renewed – albeit small – fall in the index underscores the short-run downside risks to EMU growth. More importantly, it re-emphasises the diverging growth patterns in EMU. Over the summer the PMIs pointed to relative strength in France and weakness in Germany. This has been reversed with the latest PMIs and is much more in line with our growth expectations. We expect France to have fallen into recession in H2, while we see the German economy roughly stagnating. The likely further fall in the non-core PMIs also suggests that Spain and Italy will not receive any crisis relief from growth in the short run. Against this backdrop, calls for the ECB to cut its refi rate are set to intensify again, especially with the EUR rising against the USD. A cut was widely expected at the last meeting, but may have been shelved in order to get maximum support for OMT from ECB council members. Moreover, it would not help Germany's broad political digestion of the expected ECB balance sheet expansion if the ECB starts targeting a weaker euro when Germany possesses a resilient economy and medium-term inflation expectations are rising.
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