The five charts below give a clear idea of the current economic situation in the Euro Area. In August, signals from the PMI/Markit survey are positive, leading to a more robust momentum than what was seen last spring. We can expect that the industrial production will accelerate in the coming months.
We are may be at the turning point of the business cycle with some good news concerning the futures (new orders) but also with lagging indicators that can be perceived as a drag to the economic activity. This is clearly the case for employment which is still decreasing in the survey.
One interesting point is that the improvement comes mainly from the manufacturing sector. This is a sector where goods are tradable and this means that, as I mentioned it earlier (here in French or here in English for an older post) there are probably deeper trades within the Euro Area.
The last point is that Germany is pulling the Euro index on the upside. There is a strong development in the manufacturing sector in Germany and the German picture is pretty strong. On the other side the French index remains below 50 and is still a drag to the Euro Area. We do not have details for the other Euro countries
In the first chart below the synthetic index is at 50.1 in August, above the threshold of 50 for the first time since August 2011. This doesn’t signal an immediate and strong improvement in GDP numbers for the third quarter, it means that the downside risk is receding and that’s what we have to keep in mind.
On the second chart we see that the New Orders to Inventories ratio is trending on the upside. This reflects stronger orders and an adjustment for inventories. The index is clearly above 1 meaning that companies will have to increase their production to be able to satisfy demand. That’s the very positive issue of the survey. We can expect a stronger momentum for industrial production in the coming months and this will spillover on the sector of services.
The third chart shows that employment is still contracting. To change their mind companies have to witness a long period of strong growth. This would reduce uncertainty on their activity and would reduce slacks in the production process. It will probably be at the beginning of net year.
On the fourth chart we see that the leading sector is manufacturing. It reflects and will continue to reflect stronger trade within the Euro Area and this will a strong driver to have a real turning point in the business cycle.
On the fifth chart we see the leading role played by Germany. Its index in the manufacturing sector is at 52 the highest since July 2011. France remains behind the curve.
Chart 1 – PMI/Markit Survey Synthetic Index and GDP growth
Chart 2 – Industrial Production, New Orders and Inventories