Euro area: PMIs Flattening but Still Signalling Strong Growth

• The eurozone composite PMI increased to 57.8 in April, signalling strong growth.
• Manufacturing PMI new export orders increased slightly from 57.6 to 57.8 - an indication that the negative impact of the earthquake in Japan is very moderate.
• France flash PMI was much better than expected. In particular, the service PMI surprised with an increase to 63.4 from 60.0 in March - the highest level since 2000.
• We have seen that the euro area can deliver decent growth despite the ongoing debt crisis. We continue to expect euro area GDP growth to reach 2% in 2011.
• We expect PMI to show modest decreases in the coming month but the elevated level supports our expectation that the ECB will go ahead with the next hike in July.

Details and outlook

The eurozone composite PMI increased to 57.8 in April from 57.6 in March, pulled up by an increase in manufacturing PMI to 57.7 in April compared with 57.5 in March, while service PMI decreased slightly from 57.2 to 56.9. Although PMI seems to be flattening, it is still at an elevated level, implying that PMI still signals growth well above trend. This is in line with employment PMI indices that now clearly signal that unemployment in the euro area will continue the decreasing trend.

Manufacturing PMI signals euro area GDP growth of 4% q/q annualised, while composite PMI new orders signal GDP growth just below 3% q/q annualised. The latter is best aligned with our expectations of strong albeit not miraculous growth in the first half of this year.

Manufacturing PMI new exports increased slightly from 57.6 to 57.8 - an indication that the negative impact of the earthquake in Japan is very moderate. Better-than-expected Chinese PMI data also indicate that the effect seems to be limited even in China.

The France flash PMI was much better than expected. In particular, the service PMI surprised with an increase to 63.4 in April from 60.0 in March. This is the highest level since 2000, when it was above 65. Manufacturing PMI increased to 56.9 from 55.4 in March. The German flash PMI was slightly better than expected. Manufacturing PMI increased to 61.7 in April from 60.9 in March. Apart from the peak in February, this is the highest reading since 1996. Service PMI surprised negatively with a drop to 57.7 in April from 60.1 in March. This could indicate that the German consumer is still holding back.

The continued strong PMI data supports our expectation that we will see more ECB hikes this year. However, if PMI drops dramatically over the coming months, this could influence the length of the ECB's hiking cycle. We expect PMI to show modest decreases in the coming month and the ECB will go ahead with the next hike of 25bp in July.