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Friday, 15 December 2017

PMIs and the ECB

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A need to get ahead of the curve 

Divyang Shah, Columnist

Divyang Shah, IFR Senior Strategist

With the weakness in Spain services PMI being countered by the strength in Italy it is strange that there was not more of an upside surprise to the eurozone PMI release given that both French and German readings surprised to the upside.

We would have expected more than a 0.1 point improvement in the eurozone release which came in at 52.2 after a flash reading of 52.1.

The picture is one of strengthening growth in Germany and France while growth in Italy and Spain is showing stabilisation. This should be enough to keep the mild eurozone recovery intact but with inflation low and the transmission mechanism still not working there is room for the ECB to deliver further easing to help strengthen the still fragile recovery. High/record unemployment will help to constrain the recovery further especially as fiscal policy is still in austerity mode.

There is room for the ECB to go beyond delivering just another LTRO. A reduction in the rate corridor and a further cut in the refi rate also seem appropriate to help strengthen the recovery. An ECB that is ready to consider all available instruments should instead act early. Policy is likely to be more effective when there are signs of improvement (no matter how modest) than when policy is reacting to a crisis/downturn. Beyond Germany there is little danger in providing too much stimulus when inflation and inflation risks are low. 

The table below shows the PMI releases so far. Besides Spain there have been positive surprises for the three biggest eurozone countries.

————————————-Sept Final    August final

Spain………………49.0 ………… 50.4

Italy ………….. ….52.7…………..48.8

France  ………….51.0…………..48.8

Germany ………..53.7…………..52.8


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