The flash estimate of the PMI/Markit survey for the Euro Area implies a momentum that is weaker than it was during last summer. The synthetic index is still growing but at a slower pace (see chart 1 below). The same pattern can also be seen in the production index. In the New Orders index the pace is positive but as slow as it was in October. The employment index has dropped in November; this is worrisome as it was showing almost stable employment in September. In other words, the current recovery could be weaker than expected and that could be also a reason, beside inflation, for the ECB to adopt a more accommodative monetary policy.
The weakness in November comes from the services sector. The manufacturing sector momentum is still robust and continues to expand.
With the flash estimate we just have details for Germany and for France. We see on the chart below that their profiles diverge dramatically.
The red line for Germany is trending upward rapidly and the French index, in blue, dips.
In Germany, recent surveys are all on the upside. This was the case for the PMI/Markit index, as seen above, but also for IFO and ZEW surveys. We can see that on the chart 2 below. All three indices are above 0 which is, on the whole period, the average for each index. The current dynamics in Germany is particularly strong and this can be observed in the IFO sectoral decomposition which shows robust upward trend for each sector. Internal demand seems to be a strong driver to the current economic momentum.
The French dynamics, following the PMI/Markit survey, is on the opposite of Germany. This was seen on chart 1. But we can be more precise with two sub-indices.
The first is the Employment index. Until last October it was trending upward and as the index shows persistence and low volatility we could expect, following the trend, a stabilization of private jobs at year-end. This will probably not be the case. The Employment index dipped dramatically in November. Employment stabilization is no longer expected now. The chart below is impressive. The French president commitment to stabilize and then to improve the labor market by year-end will probably not be respected.
There is another important index that has shown a U-turn in November: the New Orders to Inventories ratio is again below one. This reflects lower New Orders momentum (index at 46.1 in November after 48.3 in October) and higher inventories. What is worrisome is that this ratio profile is consistent with industrial production momentum as it is shown on chart 4. This means that the fourth quarter GDP growth could be weak.
Nevertheless, what is puzzling here is the fact that export new orders index dropped for France and increased more rapidly in Germany. We could expect a more consistent movement between the two. Is it a specific French weakness or a specific German strength?
We can’t have a definitive conclusion after this survey because the last Banque de France’s survey lets the French central bank expect a 0.4% GDP growth for the fourth quarter. The INSEE survey on the Business Climate will be interesting (Monday 25).
In previous PMI/Markit surveys the French economy was seen as a follower with a dynamics weaker than in Germany, Spain, Italy or the Netherlands. If information contains in this flash estimate is confirmed (publication December 2) then the divergence between France and Germany will be perceived as larger and will not reinforce the French position in Europe. That’s worrisome as the French – German couple is essential for the European construction to go ahead.