2 takeaways after area PMIs hint at a brighter inflation outlook
While the world is focused on the FIFA World Cup tournament and the Thanksgiving holiday this week, some important economic data worth considering was released. Yesterday, in particular, was crucial for euro traders, as the PMIs showed an improvement in the euro area’s economic conditions.
Make no mistake; the PMIs are well into contractionary territory. Any print below 50 shows a sector that contracts, and both the services and manufacturing PMIs are well below the break-even level.
Yet, investors feared worse. Flash Manufacturing PMI coming out at 47.3 vs. 46 expected was seen as good news. Moreover, Flash Services PMI at 48.8 vs. 48 expected was greeted too.
The overall rate of decline has eased compared to October
One of the few good news from yesterday’s data is that the rate of decline has eased compared to October. Warm weather contributed to investors not fearing any more energy shortages.
Moreover, supply constraints eased while price pressures cooled. In other words, a brighter inflation outlook should be a positive for the euro area economy in the months ahead.
Recession is not worsening
Perhaps the most relevant conclusion is that inflation is not worsening. Following yesterday’s PMI data, the German IFO released today was not as bad as expected.
For instance, the Business Climate Index climbed to 86.3 vs. 85 expected.
In other words, morale is rising as supply bottlenecks eased. Hence, the recession is not worsening, and that is the main takeaway when interpreting the euro area’s economic performance.
All in all, the war in Ukraine hurts the European economic output and future outlook. However, this week’s data is encouraging enough to give confidence that the worse may be behind us.
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