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News | Question of the Week, WC 23rd Sept
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Question of the Week, WC 23rd Sept

Q. Is the manufacturing recession infecting the wider EZ economy

A. The September PMIs offered a clear narrative to investors. Manufacturing weakened further, primarily due to a further decline in Germany, and the services index slid too, reversing most of its gain since the low-point at the start of the year. Markit, the survey’s publisher, was in no doubt about the key story:

“A key development in recent months has been the broadening-out of the deterioration beyond manufacturing.”

This is certainly true as far as goes the September data in isolation, but it is not the story that we see if we look beyond this month’s data. Our first chart shows that the services PMI was virtually unchanged through Q3, indicating that the recent stabilisation in growth was sustained in this quarter, even as manufacturing faltered further. 

 

Our second chart shows that the gap between the services and manufacturing PMI remains huge; it would be too pessimistic to assume that the former is now suddenly about to follow the latter. Financial conditions in the domestic economy are very accommodative, the private sector is not over levered, and households’ net worth is rising. 

Finally, a decline in the German services PMI was the main driver of the dip in the EZ aggregate in September, which is a red flag in terms of making any firm conclusions. The services PMI in Germany often swings wildly for no particular reason, and with no discernible impact on the hard data.

We are not trying to sugarcoat the EZ economic numbers. The data aren't pretty and risks are now elevated. For starters, the German economy probably is in recession, and external uncertainty is elevated, if not rising. But it is too early to conclude that the manufacturing malaise has spread, and that the economy as a whole is headed for a more widespread downturn.

Posted: 26th Sep 2019

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